Protecting Against Disaster with Contracts

Over the past 20 years, at least 267 people have been killed in one factory fire after another in the suburbs of Dhaka, Bangladesh. In a recent factory fire in Ashulia, there was no fire prevention management in place to protect human life. There are virtually no economic studies concerning accidents which could be prevented if fire prevention management were in place. This paper shows a simple way of preventing accidents, using a contract which represents both an incentive for factories and the costs to society. As fire prevention management is extremely costly for the factory, there may be an intuitive feeling that maybe a contract should not be set up, or that even if a contract is established, moral hazards may still arise. The results of this paper, counter this intuition. Furthermore, there is a rationale for implementing fire prevention management for the factory that has signed the contract.