In this paper, we consider the regulatory problem to approve or to ban a new product/technology. We formalize the government decision-making as a Tullock contest in which two lobbies are competing against one another. The originality of our paper is to assume that the industrial lobby has private information about the environmental and/or health detrimental effects, but can be held liable for damage ex post. We determine the equilibrium of the contest and derive both its positive and normative properties.

Our main result is to give conditions under which it is socially better that the government decides according to the contest, rather than according to an ex ante cost-benefit analysis, using his prior beliefs. The reason why this can be so, is because the ex post liability for harm induces the industrial lobby to reveal his private information about the environmental and/or health detrimental externalities in the contest. The reason why this is not always so, is because the liability system can be imperfect, when the maximum assets of the industrial lobby is less than the harm, and the contest is a costly scheme.