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Secrecy and Safety

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  • Andrew F. Daughety

    ()
    (Department of Economics and Law School, Vanderbilt University)

  • Jennifer F. Reinganum

    ()
    (Department of Economics and Law School, Vanderbilt University)

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 consumer'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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File URL: http://www.accessecon.com/pubs/VUECON/vu03-w17.pdf
File Function: Revised version, 2003
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0317.

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Date of creation: Aug 2003
Date of revision: Sep 2003
Handle: RePEc:van:wpaper:0317

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: confidential settlement; product safety;

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References

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  1. 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.
  2. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 224-39, March.
  3. 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.
  4. 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.
  5. 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.
  6. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  7. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 796-821, August.
  8. 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.
  9. 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.
  10. Banks, Jeffrey S. & Sobel, Joel., 1985. "Equilibrium Selection in Signaling Games," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 565, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. 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.
  12. 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.
  13. Yang, Bill Z., 1996. "Litigation, experimentation, and reputation," International Review of Law and Economics, Elsevier, Elsevier, vol. 16(4), pages 491-502, December.
  14. repec:fth:stanho:e-91-11 is not listed on IDEAS
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