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Regulation in Happyville

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  • François Salanié
  • Nicolas Treich

Abstract

How does risk perception affect risk regulation? Happyville is a society in which citizens wrongly believe that the drinking water supply is contaminated. We discuss conditions under which a benevolent Director of Environment Protection would invest in a water cleanup technology. This holds if the Director is populist, namely if he maximises social welfare based on citizens’ pessimistic beliefs. More surprisingly, investment in the water cleanup technology may occur if the Director is paternalistic, in the sense that he maximises social welfare based on his own beliefs. The reason is that he must take into account citizens’ responses to regulation.

Suggested Citation

  • François Salanié & Nicolas Treich, 2009. "Regulation in Happyville," Economic Journal, Royal Economic Society, vol. 119(537), pages 665-679, April.
    • Handle: RePEc:wly:econjl:v:119:y:2009:i:537:p:665-679
    DOI: 10.1111/j.1468-0297.2009.02221.x
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