Do you know what the Peltzman effect is? It is a phenomenon observed by an economist from the United States (USA), Sam Peltzman, in the year 1975.

This is an effect that relates to laws, government security measures and risky behaviors in society. In this article we will see what relationship exists between these elements, what this effect consists of and what this economist’s most relevant research is in relation to three types of US laws.

Peltzman Effect: What is it?

The Peltzman effect is defined as the tendency for people to adopt more risky behaviour when faced with more safety measures. This effect was observed by an economist, professor at the University of Chicago, Sam Peltzman.

Through his studies dedicated to the automobile sector, he saw how, with more safety measures, more risky behaviour by drivers ; that is, that the number of accidents was not reduced, as expected with such measures.

To this phenomenon, Peltzman gave the following explanation: drivers “compensated” for these measures by adopting risky and dangerous behaviour (as we have seen, what the economist defined as the Peltzman effect).

This effect is mainly talked about by liberal thinkers, who believe that if the state offers more protective measures, society will act with more risk and each of us will stop taking responsibility for ourselves and others. In other words: the greater the security, the greater the irresponsibility of citizens in making decisions and the greater the risk of these decisions.

Research

Sam Peltzman’s research on the Peltzman effect went beyond state safety measures (or regulations), and studied other types of measures/regulations as well. However, it can be said that his studies on safety were the most relevant.

Regulation and the natural progress of opulence was one of Peltzman’s most relevant essays on economics and state regulation. In it, he establishes five basic premises:

  • That favorable effects appear in different areas of social life, as a consequence of sustained economic progress.
  • That these effects can be slow and not very visible, sometimes.
  • That governments want to accelerate such effects through regulation.
  • That people adopt “neutralizing” behaviors.
  • That regulations are only removed if very disastrous results appear.

Laws studied by Peltzman

Through his research on the Peltzman effect, Sam Peltzman focuses on studying three types of legislation (laws), of various kinds, in the United States (USA).

Here we will see the conclusions as a result of studying the results of each of these laws, and their relationship with the Peltzman effect:

1. The Traffic and Vehicle Safety Act (1966)

This law was intended to increase road safety and, as a result, reduce the number of road accidents (and their associated deaths). Statistics for the years 1925-1960 revealed that the number of deaths in traffic accidents was reduced by 3.5% per year . In other words, safety had improved (before the Act).

What was the reason for this improvement? Different factors: driver knowledge, better roads, etc. Specifically, the law was based on the fact that road safety basically depended on the safety elements available in cars, which were designed to protect their occupants from accidents (or rather, from their consequences).

However, Peltzman found that these government regulations or safety measures indirectly encouraged drivers to engage in more risky behaviour , because “the more protection, the lower the price of being risky” (i.e. there was a “trade-off” that drivers had in mind).

Results

Thus, the additional risks outweighed the benefits of these safety measures; however, Peltzman failed to calculate the exact proportions of these data.

Thus, through this Law, although the number of deaths (of car occupants) due to traffic accidents was reduced, the number of accidents increased notably, as well as the number of deaths of cyclists, motorcyclists and pedestrians.

Thus, between 1966 and 2002 (i.e. since the Law came into force), total deaths due to accidents fell by 3.5% per year, the same figure as before the Law, although the number of accidents did increase, as we have seen.

2. The Persons with Disabilities Act (1990)

Another study that also evidences the Peltzman effect. Thus, this law prohibits all types of discrimination against people with disabilities in the workplace , and obliges them to be offered a job suitable for their disability.

Before 1990, employment in this group was already increasing. However, after the law was passed, different studies showed how employment in this group had decreased. How could this be? It seemed that the law was having just the opposite effect: creating incentives not to hire people with disabilities.

Specifically, what was happening was the following: before the law, some employers hired people with disabilities; sometimes everything went smoothly, and sometimes not, which made the employer dispense with their services.

What happens with the passing of the Act? That the relative costs of hiring and firing, increase . In case of not hiring a person with a disability, the employer could be accused of discrimination, but if he hired and then fired her, he could also be accused of discrimination, and in addition the costs were higher.

Results

According to Sam Peltzman, with the approval of this law, the entrepreneur had to face the cost of hiring and not hiring . However, as the former (costs of hiring) were higher, the employer directly tended not to hire people with disabilities.

In this way, the reduction was in new hires after the law, and not so much in the dismissals of those who were already working.

3. The Endangered Species Act (1973)

The third law studied by Peltzman referred to animals in danger of extinction, and in his studies the Peltzman effect also appears. Thus, this law had the mission of protecting the species in danger of extinction , and orders the Fish and Wildlife Service (FWS) to determine which species are in danger (or may be in the future) and which are not.

Thus, the species included in this list were “protected” (since the private owners of their habitat areas could not alter anything that could harm them). What happened? In 1973, 119 species were listed.

Results

Over the next 30 years, 40 new species were added to the list each year. The results show how in 30 years only 6 species had been “saved” (no longer considered to be in danger of extinction). Thus, the results of the law were very negative .

How did Sam Peltzman explain this? This researcher alludes to a neutralizing behavior of people, which he calls “preventive development” . And to illustrate this, he gives an example: the species of woodpecker. This species resides on farms that have many trees. If the bird appeared on one of these farms, the owners of the nearby farms would cut down the trees (because if not, they would lose all the wood). The same thing happened with other types of species, which resulted in the poor recovery of the species shown in Peltzman’s results.

Conclusions

We have seen some of Sam Peltzman’s most impacting studies, which illustrate how and why the Peltzman effect occurs. Two conclusions can be drawn from them: if a law or regulation is passed for safety or protection, a behavioural impact study should be carried out first .

On the other hand, it is important that, after a specific time interval following the approval of a type of law such as those exemplified, it is convenient to review whether the law (regulation or measure) has offered positive or negative results in terms of its initial mission.

Bibliographic references:

  • Bambarén, C. and Chú, M. (2013). Regulation of transport and traffic accidents by motor vehicles in Peru. Rev Med Hered, 24(4): 305-310.
  • Gregory Mankiw, N. (2012). Principles of economics. (6th Ed.). Cengage Learning.

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  • Peltzman, S. (2013). Regulation and the Wealth of Nations: The Connection between Government Regulation and Economic Progress.