We 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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Andrew F. Daughety & Jennifer F. Reinganum, 2005.
"Secrecy and Safety,"
American Economic Review,
American Economic Association, vol. 95(4), pages 1074-1091, September.
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Andrew F. Daughety & Jennifer F. Reinganum, 2003.
"Secrecy and Safety,"
Working Papers
0317, Department of Economics, Vanderbilt University, revised Sep 2003.
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Find related papers by JEL classification: K0 - Law and Economics - - General L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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Andrew F. Daughety & Jennifer F. Reinganum, 1999.
"Hush Money,"
RAND Journal of Economics,
The RAND Corporation, vol. 30(4), pages 661-678, Winter.
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