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Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability

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  • Florian Baumann

    (Eberhard Karls University, Department of Economics)

  • Tim Friehe

    (University of Konstanz, Department of Economics)

  • Kristoffel Grechenig

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

This article shows that it may be socially optimal to grant accident victims less than full compensation. In our framework, firms are liable under product liability but also invest in care to prevent consumers switching to competitors. Affecting the partition of consumers by means of care-taking is not desirable from a social standpoint. Consequently, it may be optimal to reduce liability below full compensation in order to adjust firms’ care incentives.

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Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2010_03.

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Date of creation: Jan 2010
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Handle: RePEc:mpg:wpaper:2010_03

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Keywords: Tort law; product liability; care level; asymmetric information; switching;

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