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Manufacturer Liability for Harms Caused by Consumers to Others

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  • Bruce Hay
  • Kathryn E. Spier
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    Abstract

    Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets, then manufacturer liability is not desirable. If homogeneous consumers have limited assets, then the best rule is "residual-manufacturer liability" where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be preferred.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282805775014416
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    Bibliographic Info

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

    Volume (Year): 95 (2005)
    Issue (Month): 5 (December)
    Pages: 1700-1711

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    Handle: RePEc:aea:aecrev:v:95:y:2005:i:5:p:1700-1711

    Note: DOI: 10.1257/000282805775014416
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    References

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    1. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
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    7. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
    8. Doughety, Andrew F & Reinganum, Jennifer F, 1997. "Everybody Out of the Pool: Products Liability, Punitive Damages, and Competition," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(2), pages 410-32, October.
    9. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
    10. McKean, Roland N, 1970. "Products Liability: Implications of Some Changing Property Rights," The Quarterly Journal of Economics, MIT Press, vol. 84(4), pages 611-26, November.
    11. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    12. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March.
    13. Hamada, Koichi, 1976. "Liability Rules and Income Distribution in Product Liability," American Economic Review, American Economic Association, vol. 66(1), pages 228-34, March.
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    Cited by:
    1. Che, Yeon-Koo & Spier, Kathryn, 2006. "Strategic Judgment Proofing," MPRA Paper 6100, University Library of Munich, Germany.
    2. Thomas J. Miceli & Rebecca Rabon & Kathleen Segerson, 2012. "Liability versus Regulation for Controlling Product-Related Risks," Working papers 2012-17, University of Connecticut, Department of Economics.
    3. Langinier, Corinne & Marcoul, Philippe, 2009. "Contributory infringement rule and patents," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 296-310, May.
    4. Bhole, Bharat & Wagner, Jeffrey, 2008. "The joint use of regulation and strict liability with multidimensional care and uncertain conviction," International Review of Law and Economics, Elsevier, vol. 28(2), pages 123-132, June.

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