Voluntary Product Safety Certification

Abstract

This paper describes the incentives for firms to seek voluntary product safety certifications. We consider a firm that makes the decision of whether or not to seek certification prior to selling the product. We show that even when the firm and the consumers have the same beliefs about the product’s safety, there are incentives for the firm to seek safety certification. The main analysis investigates the role of consumer moral hazard and shows that it can lead to greater incentives for voluntary certification when inherent product safety and effort are substitutes, but smaller incentives when they are complements. The analysis of consumer moral hazard provides a nuanced perspective on the so-called risk compensation or the “Peltzman effect” phenomenon, which postulates higher levels of accidents for safer products. In our paper, products that are successfully certified can end up with a higher incidence of accidents. We also uncover an interesting nonmonotonic relationship between effectiveness of consumers’ effort and the firm’s incentives to seek certification. Finally, we find that certification can be welfare enhancing in the presence of consumer moral hazard. This paper was accepted by Matthew Shum, marketing.