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Product Safety: Liability, R&D, and Signaling

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Author Info
Daughety, Andrew F
Reinganum, Jennifer F

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Abstract

The authors develop a monopoly model of product design and safety signaling incorporating a parametric liability specification. The firm first engages in R&D to affect the safety of its product. Since the outcome of R&D trials is unobservable to consumers, the firm then chooses its price, understanding that consumers may draw inferences from the price about the product's safety. Consumers acquire and use the product; injuries lead to losses which are allocated by the liability system. The authors vary the liability system's allocation of losses and trace out the implications for R&D investment and the price-safety relationship. Copyright 1995 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 85 (1995)
Issue (Month): 5 (December)
Pages: 1187-1206
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Handle: RePEc:aea:aecrev:v:85:y:1995:i:5:p:1187-1206

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law & Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  2. Polinsky, A. Mitchell & Rubinfeld, Daniel L., 1988. "The deterrent effects of settlements and trials," International Review of Law and Economics, Elsevier, vol. 8(1), pages 109-116, June. [Downloadable!] (restricted)
  3. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June. [Downloadable!] (restricted)
  4. P. A. Diamond, 1973. "Single Activity Accidents," Working papers 113, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Blackwell Publishing, vol. 49(4), pages 499-516, October. [Downloadable!] (restricted)
  6. Riordan, Michael H, 1986. "Monopolistic Competition with Experience Goods," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 265-79, May. [Downloadable!] (restricted)
  7. Png, I. P. L., 1987. "Litigation, liability, and incentives for care," Journal of Public Economics, Elsevier, vol. 34(1), pages 61-85, October. [Downloadable!] (restricted)
  8. Franklin Allen, 1984. "Reputation and Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 311-327, Autumn. [Downloadable!] (restricted)
  9. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer. [Downloadable!] (restricted)
  10. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 561-72, October. [Downloadable!] (restricted)
  11. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  12. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November. [Downloadable!] (restricted)
  13. Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  14. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March. [Downloadable!] (restricted)
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  15. Cooper, Russell & Ross, Thomas W., 1985. "Monopoly provision of product quality with uninformed buyers," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 439-449, December. [Downloadable!] (restricted)
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  16. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February. [Downloadable!] (restricted)
  17. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August. [Downloadable!] (restricted)
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  18. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March. [Downloadable!] (restricted)
  19. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Blackwell Publishing, vol. 51(2), pages 197-207, April. [Downloadable!] (restricted)
  20. Marilyn J. Simon, 1981. "Imperfect Information, Costly Litigation, and Product Quality," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 171-184, Spring.
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J.-C. Bureau & E. Gozlan & S. Marette, 1999. "Quality signaling and international trade in food products," THEMA Working Papers 99-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
    Other versions:
  2. Carriquiry, Miguel A. & Babcock, Bruce A., 2004. "Reputation, Quality Observability, and the Choice of Quality Assurance Systems," Staff General Research Papers 12038, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  3. Marette, Stéphan, 2007. "Minimum Safety Standard, Consumers’ Information, and Competition (The)," Staff General Research Papers 12718, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  4. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Products Liability, Signaling and Disclosure," Working Papers 0625, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  5. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Secrecy and Safety," Working Papers 0317, Department of Economics, Vanderbilt University, revised Sep 2003. [Downloadable!]
    Other versions:
  6. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Working Papers 0703, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  7. Bruce Hay & Kathryn E. Spier, 2005. "Manufacturer Liability for Harms Caused by Consumers to Others," American Economic Review, American Economic Association, vol. 95(5), pages 1700-1711, December. [Downloadable!]
  8. Gonzalez, Patrick, 2002. "Investment and Screening under Asymmetric Endogenous Information," Cahiers de recherche 0201, GREEN. [Downloadable!]
    Other versions:
  9. Palumbo, Giuliana & Iossa, Elisabetta, 2002. "Lender liability in the Consumer Credit Market," Economics Working Papers (Ensaios Economicos da EPGE) 451, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  10. Chris William Sanchirico, 2004. "Relying on the Information of Interested--and Potentially Dishonest--Parties," Law and Economics 0403001, EconWPA. [Downloadable!]
  11. Stéphan Marette, 2007. "Minimum safety standard, consumers’ information and competition," Journal of Regulatory Economics, Springer, vol. 32(3), pages 259-285, December. [Downloadable!] (restricted)
  12. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Hidden Talents: Partnerships with Pareto-Improving Private Information," Working Papers 0613, Department of Economics, Vanderbilt University. [Downloadable!]
  13. Chris Sanchirico & George Triantis, . "Evidence Arbitrage: The Fabrication of Evidence and the Verifiability of Contract Performance," Scholarship at Penn Law upenn_wps-1005, University of Pennsylvania Law School. [Downloadable!]
    Other versions:
  14. Frenzen, Paul D. & Buzby, Jean C. & Rasco, Barbara, 2001. "Product Liability And Microbial Foodborne Illness," Agricultural Economics Reports 34059, United States Department of Agriculture, Economic Research Service. [Downloadable!]
  15. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Markets, Torts and Social Inefficiency," Working Papers 0308, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  16. Auriol, Emmanuelle & Schilizzi, Steven, 2003. "Quality Signaling through Certification. Theory and an Application to Agricultural Seed Market," IDEI Working Papers 165, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  17. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Imperfect Competition and Quality Signaling," Working Papers 0520, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  18. Dinopoulos, Elias & Livanis, Grigorios & West, Carol, 2005. "How Cool is C.O.O.L.?," Working Papers 15658, University of Florida, International Agricultural Trade and Policy Center. [Downloadable!]
  19. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Working Papers 0417, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  20. Bruce Hay & Kathryn E. Spier, 2004. "Manufacturer Liability for Harms Caused by Consumers to Others," NBER Working Papers 10972, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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