On consumer preferences for (partial) products liability
Introduction
Both the size and the scope of the potential liability have increased over the past fifty years (e.g., Rubin, 2005). Potential explanations are an optimal adaptation of the legal system to changing circumstances (e.g., Landes and Posner, 1985) or rent seeking. Traditional law and economics analyses of products liability find that different liability regimes lead to the same market outcome in terms of product safety and output (e.g., Daughety and Reinganum, 2018). This irrelevance result practically excludes rent seeking on part of the consumers as an explanation for the above observation. The very small literature on the political economy of products liability so far focuses particularly on lawyers’ efforts in changing the structure of the law (Epstein, 1988, Rubin and Bailey, 1994, Rubin, 2005).
We present a setting in which products liability is costly and show that, nevertheless, some consumers strictly benefit from products liability, and in some constellations all consumers do. Our formal analysis can support the informal discussion in Osborne (2002) that recent developments of products liability may be largely due to efforts by consumers.
Section snippets
Consumers.
Consumers may purchase a product that generates gross consumption benefit . Consumers may suffer harm after an accident due to the consumption of the product. The probability of an accident is , where denotes (observable) product safety. Consumers may sue the firm under strict liability for damages amounting to , thereby incurring litigation costs where is distributed according to on . We assume , , and .
Firm.
A monopolist chooses the product safety and the
Stage 3 (Litigation Decisions).
After an accident, consumers with sue the firm for compensation . We will refer to consumers who (do not) sue the firm as type () consumers.
Stage 2 (Consumption Decisions).
Consumers obtain an expected net benefit from consuming the product. Consumers obtain an expected net benefit Consumers purchase the product only if , .
Stage 1 (Monopolist’s Decisions).
The firm maximizes expected profits using and . The firm may select to serve either consumers of type
Conclusion
We present a simple framework that describes consumer preferences for products liability, finding that some consumers support and no consumer objects its introduction despite its inefficiency. We sketch a constellation in which all consumers prefer the same partial compensation of losses. In our framework, products liability reduces efficiency due to litigation costs, excessive product safety levels, and a possible contraction of output.
Our analysis is limited in several ways. We abstract from
Acknowledgement
Part of this paper was written while Friehe and Schulte were visiting EconomiX and University Paris Nanterre. Their support is gratefully acknowledged.
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