The more the merrier? Disciplinary actions against malpractice

In a world of experience goods, two costly ex-post disciplinary actions can be used against malpractice of firms: consumer lawsuits and government investigation. We distinguish between government exectiveness in detecting 'bad behavior' vs. 'good behavior' of firms - both play a key role in the model. Our results suggest that while an exective government eliminates malpractice completely, the intervention of an ineffective government may backfire, failing to protect the product safety. The reason is that on top of its inexectiveness, the government may deter consumers from pursuing lawsuits (crowding-out), augmenting the malpractice of firms compared to an equilibrium without government intervention. Additionally, an improvement in government ability to detect 'bad behavior' should be complemented by a reduction of lawsuit cost or an improvement in the ability to detect 'good behavior' in order to restore consumer incentive to pursue lawsuits.