Abstract
It is sometimes argued that road safety measures or automobile safety standards fail to save lives because safer highways or safer cars induce more dangerous driving. A similar but less extreme view is that ignoring the behavioural adaptation of drivers would bias the cost-benefit analysis of a traffic safety measure. This paper derives cost-benefit rules for automobile safety regulation when drivers may adapt their risk taking behaviour in response to changes in the quality of the road network or to more demanding vehicle safety standards. The focus is on the financial externalities induced by accidents because of the insurance system as well as on the consequences of drivers’ risk aversion. (Author/publisher)