Myopic CEOs and Product Safety (Re)design: Internal versus External Enforcement

Before products are released into a market, regulators require the product's
designs to be evaluated for safety standards either by an external or internal
evaluator. Failing these standards requires product redesign. This paper theoretically
analyzes the effectiveness of internal versus external evaluators in the
presence of myopic CEOs who determine the product's safety level. We show
that CEOs' first-mover advantage incentivizes them to design products that
are suboptimal for firms' owners (profit) and society (welfare). When CEOs
are sufficiently myopic, a firm's owners may prefer external evaluators even
when they are uninformed and underestimate the costs associated with product
redesign.