Assessing the safety regulatory process of compliance-based paradigm in China using a signalling game model

Abstract

Although safety regulation has been regarded by the Chinese government to be an important contributor to preventing accidents, major accidents have not been effectively controlled in recent years. The adoption of a compliance-based regulatory paradigm by government regulators has been widely criticized. This paper mainly assesses how the safety regulatory process of this paradigm influences the regulatory effect under the information asymmetry by establishing a signalling game model between government regulators and regulated companies. Different Perfect Bayesian Nash Equilibrium points are solved under three different conditions. The results show that separation strategy equilibrium occurs under the condition of low expected accident loss, implying that the expected accident loss and the expected learning cost are positively and negatively correlated with the compliance production of companies, respectively. Mixed strategy equilibrium appears in the case of medium accident loss, implying that government regulators should rely on both regulations and experience in the current regulatory process in which the government pursues compliance but ignores the knowledge, capabilities and experience of regulators. Semi-separation strategy equilibrium occurs when the expected loss of an accident is low, suggesting that low-risk industries with a small number of accidents do not require many safety regulations; otherwise it is prone to over-regulation. In addition, a major barrier to the effectiveness of the compliance regulatory paradigm occurs when the inherent effectiveness of regulations is reduced due to companies lacking information in the regulatory process.