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Manufacturer Liability for Harms Caused by Consumers to Others

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Author Info
Bruce Hay
Kathryn E. Spier
Abstract

Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets then manufacturer liability is not economically efficient. It is more efficient for the consumers themselves to bear responsibility for the harms that they cause. If homogeneous consumers have limited assets, then the most efficient rule is "residual-manufacturer liability" where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be more efficient.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10972.

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Date of creation: Dec 2004
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Handle: RePEc:nbr:nberwo:10972

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Find related papers by JEL classification:
K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability
D62 - Microeconomics - - Welfare Economics - - - Externalities

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  1. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December. [Downloadable!] (restricted)
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  2. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-67, May. [Downloadable!] (restricted)
  3. Hamilton, Stephen F., 1998. "Taxation, Fines, And Producer Liability Rules: Efficiency And Market Structure Implications," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20928, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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  4. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 561-72, October. [Downloadable!] (restricted)
  5. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June. [Downloadable!] (restricted)
  6. 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.
  7. 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. [Downloadable!] (restricted)
  8. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March. [Downloadable!] (restricted)
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  9. Hamada, Koichi, 1976. "Liability Rules and Income Distribution in Product Liability," American Economic Review, American Economic Association, vol. 66(1), pages 228-34, March. [Downloadable!] (restricted)
  10. Carlton, Dennis W & Loury, Glenn C, 1980. "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 559-66, November. [Downloadable!] (restricted)
  11. A. Mitchell Polinsky & William P. Rogerson, 1983. "Products Liability, Consumer Misperceptions, and Market Power," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 581-589, Autumn. [Downloadable!] (restricted)
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  12. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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