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Secrecy and Safety

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  • Jennifer F. Reinganum
  • Andrew F. Daughety

Abstract

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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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 53.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:53

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Keywords: product saftey; confidential settlement;

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References

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  1. Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(7), pages 907-930, September.
  2. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 179-221, May.
  3. Mark N. Hertzendorf, 1993. "I'm Not a High-Quality Firm -- But I Play One on TV," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 236-247, Summer.
  4. Laurent Linnemer, 1998. "Entry Deterrence, Product Quality: Price and Advertising as Signals," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 7(4), pages 615-645, December.
  5. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, Econometric Society, vol. 55(3), pages 647-61, May.
  6. Mark N. Hertzendorf & Per Baltzer Overgaard, 2001. "Price Competition and Advertising Signals: Signaling by Competing Senders," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 10(4), pages 621-662, December.
  7. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Product Safety: Liability, R&D and Signaling," Game Theory and Information, EconWPA 9403007, EconWPA, revised 30 Mar 1994.
  8. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 709, Cowles Foundation for Research in Economics, Yale University.
  9. Kyle Bagwell, 1991. "Pricing to Signal Product Line Quality," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 921, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
  12. repec:fth:stanho:e-91-11 is not listed on IDEAS
  13. Andrew F. Daughety & Jennifer F. Reinganum, 2002. "Informational Externalities in Settlement Bargaining: Confidentiality and Correlated Culpability," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 587-604, Winter.
  14. Yang, Bill Z., 1996. "Litigation, experimentation, and reputation," International Review of Law and Economics, Elsevier, Elsevier, vol. 16(4), pages 491-502, December.
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