Unscrupulous railroads

An unscrupulous railroad may decide to improve short-run profits by reducing preventive efforts. It might do so if it is close to bankruptcy, and feels that it can escape accident cost in the future. It might also do so if it feels that customers will fail to recognize that an inferior product is now offered and will continue to pay a high price for the service. These railroads value the short-run profits more that the possible repercussions when customers recognize that they have been cheated and decide to shun the railroad. 

An alternative for customers of small railroads is information on safety inputs. Examples might be the average experience of the staff, the age and condition of equipment, and the level of safety-related expenditures. Information of this type will be especially useful in ameliorating the market failure due to myopia. Myopic railroads will tend to be inexperienced firms who do not have a long safety output track record to report on, or unscrupulous railroads who are cheating by deviating from their past safety performance. 

The final reason for possible direct safety regulation is the prevention of cheating by unscrupulous railroads. The government might have to be involved if it is felt that customers are unable to quickly detect cheating. Even previously well-informed customers may not immediately recognize that a lower quality service is offered, especially if the cheating takes the form of deterred maintenance of track or other capital equipment. 

Objective Prevent myopia by inexperienced railroads Prevent myopia by unscrupulous railroads... 

The labor economics literature identifies two major market failures. The first is a lack of labor mobility. The basic model assumes that workers are free to select between occupations and employers based on their own preferences and the wages and conditions offered. If some people are constrained either by geography or by their level of skill and education, there is the possibility that unscrupulous employers may take advantage of a captive workforce by offering substandard wages and/or safety conditions. Arguments of this type are not really applicable to the railroad industry. The railroad industry requires skills that are readily transferable to other occupations, and employs a workforce who are, almost by definition, quite mobile. 

A possible consequence of unscrupulous myopic behavior is that railroads may use the cover of bankruptcy protection to avoid paying compensation to injured employees, customers and bystanders. A possible solution to this problem is to ensure that railroads have enough assets to provide for such payment or hold liability insurance. Insurance companies pool risk across various railroads and the other kinds of risks that they insure against, and therefore can pay out even if one of their clients is forced in bankruptcy. 

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