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Risk, Informational Asymmetry and Product Liability; An enquiry into conflicting objectives

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  • Ram Singh

    (Department of Economics, Delhi School of Economics, Delhi, India)

Abstract

Risky products cause two types of costs for society; the accident costs and the insurance costs. Liability rules allocate these costs between the parties involved. The expansion in the scope of product liability over the past thirty years has increased the cost of third-party liability insurance. However, the economic analysis of product liability rules has, generally, focused on only the accident costs. Some recent works have suggested that there is a strict trade-off involved when it comes to minimizing the accident costs and the insurance costs. In this paper, we have extended the economic analysis by considering both types of costs. An efficiency characterization of product liability rules has been provided by assuming that consumers lack in the knowledge about the risk. We have shown that even when consumers misperceive the product risk, it possible to achieve efficiency with respect to the insurance costs as well as the care levels.

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Bibliographic Info

Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 164.

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Length: 33 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:cde:cdewps:164

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Keywords: Product liability; informational asymmetry; accident costs; insurance costs; Nash equilibrium; economic efficiency;

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  1. Victor P. Goldberg, 1974. "The Economics of Product Safety and Imperfect Information," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 683-688, Autumn.
  2. 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.
  3. Edward E. Schlee, 1996. "The Value of Information About Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 803-815, Winter.
  4. James Boyd, 1994. "Risk, Liability, and Monopoly," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 1(3), pages 387-403.
  5. Burrows, Paul, 1992. "Consumer safety under products liability and duty to disclose," International Review of Law and Economics, Elsevier, vol. 12(4), pages 457-478, December.
  6. Beales, Howard & Craswell, Richard & Salop, Steven C, 1981. "The Efficient Regulation of Consumer Information," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 491-539, December.
  7. Hamada, Koichi, 1976. "Liability Rules and Income Distribution in Product Liability," American Economic Review, American Economic Association, vol. 66(1), pages 228-34, March.
  8. Sunding, David L. & Zilberman, David, 1998. "Allocating Product Liability in a Multimarket Setting," International Review of Law and Economics, Elsevier, vol. 18(1), pages 1-11, March.
  9. Emons, Winand & Sobel, Joel, 1991. "On the Effectiveness of Liability Rules when Agents Are Not Identical," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 375-90, April.
  10. A. Mitchell Polinsky, 1980. "Strict Liability versus Negligence in a Market Setting," NBER Working Papers 0420, National Bureau of Economic Research, Inc.
  11. Ram Singh, 2003. "Efficiency of 'Simple' Liability Rules When Courts Make Erroneous Estimation of the Damage," European Journal of Law and Economics, Springer, vol. 16(1), pages 39-58, July.
  12. Leland, Hayne E, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality: Comment," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 485-89, December.
  13. Stephen F. Hamilton, 1998. "Taxation, Fines, and Producer Liability Rules: Efficiency and Market Structure Implications," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 140-150, July.
  14. Walter Y. Oi, 1973. "The Economics of Product Safety," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 3-28, Spring.
  15. Emons,Winand, 1988. "Efficient liability rules for an economy," Discussion Paper Serie A 213, University of Bonn, Germany.
  16. Geistfeld, Mark, 1995. "Manufacturer moral hazard and the Tort-contract issue in products liability," International Review of Law and Economics, Elsevier, vol. 15(3), pages 241-257, September.
  17. Miceli, Thomas J., 1997. "Economics of the Law: Torts, Contracts, Property, Litigation," OUP Catalogue, Oxford University Press, number 9780195103908, September.
  18. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Marino, Anthony M., 1988. "Products liability and scale effects in a long-run competitive equilibrium," International Review of Law and Economics, Elsevier, vol. 8(1), pages 97-107, June.
  20. Emons, Winand, 1990. "Efficient liability rules for an economy with non-identical individuals," Journal of Public Economics, Elsevier, vol. 42(1), pages 89-104, June.
  21. 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.
  22. Jones, Philip & Hudson, John, 1996. "Signalling product quality: When is price relevant?," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 257-266, August.
  23. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  24. 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.
  25. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
  26. Schwartz, Alan & Wilde, Louis L, 1985. "Product Quality and Imperfect Information," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 251-62, April.
  27. John Kambhu, 1982. "Optimal Product Quality under Asymmetric Information and Moral Hazard," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 483-492, Autumn.
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