Risk, Liability, and Monopoly
AbstractThe paper explores a monopolist's safety and output choices when there are potentially large-scale claims that can lead to firm insolvency. Analysis of a monopolized market yields different conclusions than models of rule choice where perfect competition or simple cost-minimization are assumed. The following are shown to be true when consumers do not internalize expected, uncompensated hazard costs: (1) potentially insolvent firms may make more efficient safety and output choices than fully capitalized firms and (2), for any level of capitalization, compliance with a negligence rule—where liabilities are removed—may in fact result in less output and safety than under strict liability, where hazard costs are at least partially internalized. When consumers fully discount risks, a negligence rule dominates strict liability because it allows for less costly, credible commitments to profit- and welfare-maximizing safety investments. The analysis demonstrates that the optimal legal system—including financial responsibility requirements—is particularly sensitive to market structure and the characteristics of firms' risk reduction technology
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.
Volume (Year): 1 (1994)
Issue (Month): 3 ()
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- Florian Baumann & Tim Friehe, 2012.
"Optimal Damages Multipliers in Oligopolistic Markets,"
Working Paper Series of the Department of Economics, University of Konstanz
2012-08, Department of Economics, University of Konstanz.
- Baumann, Florian & Friehe, Tim, 2012. "Optimal damages multipliers in oligopolistic markets," DICE Discussion Papers 80, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
- Ram Singh, 2008.
"Risk, Informational Asymmetry and Product Liability: An Enquiry into Conflicting Objectives,"
- 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, 02.
- Ram Singh, 2008. "Risk, Informational Asymmetry and Product Liability; An enquiry into conflicting objectives," Working papers 164, Centre for Development Economics, Delhi School of Economics.
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