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Imperfect Information, Costly Litigation, and Product Quality

Author

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  • Marilyn J. Simon

Abstract

This article examines the effect of costly litigation and imperfect information on the quality of output. An equilibrium is described in which consumers are uncertain about the result of a lawsuit. The findings show that for a wide range of due care standards there will be both negligent and nonnegligent firms in the market. Furthermore, as the population becomes more risk averse the proportion of output produced by negligent firms increases. If absolute risk aversion decreases as income increases, and there is market segmentation, reliance on litigation to control product quality will have undesirable distributional effects.

Suggested Citation

  • 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.
    • Handle: RePEc:rje:bellje:v:12:y:1981:i:spring:p:171-184
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    Cited by:

    1. Tonja Jacobi, 2009. "The Role of Politics and Economics in Explaining Variation in Litigation Rates in the U.S. States," The Journal of Legal Studies, University of Chicago Press, vol. 38(1), pages 205-233, January.
    2. Ram Singh, 2009. "RISK, INFORMATIONAL ASYMMETRY AND PRODUCT LIABILITY: An Enquiry Into Conflicting Objectives," Pacific Economic Review, Wiley Blackwell, vol. 14(1), pages 89-112, February.
    3. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
    4. Ralf Ewert & Eberhard Feess & Martin Nell, 2000. "Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance," European Accounting Review, Taylor & Francis Journals, vol. 9(3), pages 371-385.
    5. Joaquín Coleff, 2020. "Can consumer complaints reduce product reliability? Should we worry?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 74-96, January.
    6. A. Mitchell Polinsky & Daniel L. Rubinfeld, 1986. "The Welfare Implications of Costly Litigation in the Theory of Liability," NBER Working Papers 1834, National Bureau of Economic Research, Inc.
    7. Coleff, Joaquín, 2011. "Product reliability, consumers’ complaints and market performance: the case of consumers’ associations," UC3M Working papers. Economics we1121, Universidad Carlos III de Madrid. Departamento de Economía.
    8. Ram Singh, 2002. "Characterization of Efficient Product Liability Rules: When Consumers are Imperfectly Informed," Working papers 110, Centre for Development Economics, Delhi School of Economics.
    9. Yongmin Chen & Xinyu Hua, 2017. "Competition, Product Safety, and Product Liability," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(2), pages 237-267.
    10. Yongmin Chen & Xinyu Hua, 2012. "Ex Ante Investment, Ex Post Remedies, And Product Liability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(3), pages 845-866, August.

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