Secrecy and Safety
AbstractWe employ a simple two-period model to show that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average product safety than that which would be produced if a firm were committed to openness. Moreover, confidentiality can even lead to declining average product safety over time. We also show that a rational risk-neutral consumerÂ’s response to a market environment, wherein a firm engages in confidential settlement agreements, may be to reduce demand. We discuss how firm profitability is influenced by the decision to have open or confidential settlements; all else equal, a firm following a policy of openness will pay higher equilibrium wages and incur higher training costs, though product demand will not be diminished (as it may be for a firm employing confidentiality). Further, we characterize the choice of regime, providing conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm will choose to pay for auditing and eschew confidentiality
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 53.
Date of creation: 11 Aug 2004
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product saftey; confidential settlement;
Other versions of this item:
- Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Secrecy and Safety," Vanderbilt University Department of Economics Working Papers 0317, Vanderbilt University Department of Economics, revised Sep 2003.
- Andrew Daughety & Jennifer Reinganum, . "Secrecy and Safety," American Law & Economics Association Annual Meetings 1039, American Law & Economics Association.
- K0 - Law and Economics - - General
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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