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Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market

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  • Eric Helland
  • Darius N. Lakdawalla
  • Anup Malani
  • Seth A. Seabury

Abstract

In a complex economy, production is vertical and crosses jurisdictional lines. Goods are often produced by an upstream national or global firm and improved or distributed by local firms downstream. In this context, heightened products liability may have unintended consequences on product sales and consumer safety. Conventional wisdom holds that an increase in tort liability on the upstream firm will cause that firm to (weakly) increase investment in safety or disclosure. However, this may fail in the real-world, where upstream firms operate in many jurisdictions, so that the actions of a single jurisdiction may not be significant enough to influence upstream firm behavior. Even worse, if liability is shared between upstream and downstream firms, higher upstream liability may mechanically decrease liability of the downstream distributor and encourage more reckless behavior by the downstream firm. In this manner, higher upstream liability may perversely increase the sales of a risky good. We demonstrate this phenomenon in the context of the pharmaceutical market. We show that higher products liability on upstream pharmaceutical manufacturers reduces the liability faced by downstream doctors, who respond by prescribing more drugs than before.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20005.

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Date of creation: Mar 2014
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Handle: RePEc:nbr:nberwo:20005

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  1. Janet Currie & W. Bentley MacLeod, 2006. "First Do No Harm?: Tort Reform and Birth Outcomes," NBER Working Papers 12478, National Bureau of Economic Research, Inc.
  2. Bruce Hay & Kathryn E. Spier, 2005. "Manufacturer Liability for Harms Caused by Consumers to Others," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1700-1711, December.
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  6. Wesley Yin & Darius Lakdawalla, 2011. "Insurers’ Negotiating Leverage and the External Effects of Medicare Part D," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2011-065, Boston University - Department of Economics.
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  9. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
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  11. Eric Helland & Mark H. Showalter, 2009. "The Impact of Liability on the Physician Labor Market," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 52(4), pages 635-663, November.
  12. A. Mitchell Polinsky & William P. Rogerson, 1983. "Products Liability, Consumer Misperceptions, and Market Power," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 581-589, Autumn.
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