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Cumulative Harm and Resilient Liability Rules for Product Markets

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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

In the traditional model of the law and economics of torts, harm accrues proportional to use. This has the remarkable implication for products-generated torts that product performance concerns (e.g., issues of care and of liability for harm) can be considered independently of market performance concerns (e.g., market structure and competition). Moreover, the classical analysis finds that all liability regimes (strict liability, no liability, and negligence based on the socially-efficient due care standard) yield the same choice of care by the firm in the unilateral care tort model. We modify the standard model to allow for cumulative harm (that is, the per-unit expected harm is increasing in the level of use); examples from pharmaceuticals, environmental risks, privacy, food products, and mechanical systems are provided. We show that, when expected harm is cumulative, the separation between the level of care and the level of output does not occur. We further show that the different possible liability regimes now produce different outcomes and yield different implications for social efficiency. This implies an interaction between law concerned with liability and law concerned with market performance. Since these generally governmental (and private law) responsibilities are divided among relevant agencies and institutions, and are the subjects of different bodies of law, this presents a challenge to the correct design of rules for agents in the economy. We argue for selection among alternative liability regimes based upon what we refer to as �resilience:� a resilient policy is robust to the incentives for agents to undermine it and flexible with respect to outside influences (e.g., from antitrust authorities or regulators). Strict liability is a resilient policy; no liability and negligence are not resilient. Thus, we provide a new argument for strict liability with respect to product-generated harms.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w25.pdf
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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 1125.

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Date of creation: Dec 2011
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Handle: RePEc:van:wpaper:1125

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

Related research

Keywords: Products liability; strict liability; negligence; cumulative harm; product quality;

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  1. Steven Shavell, 1984. "A Model of the Optimal Use of Liability and Safety Regulation," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 271-280, Summer.
  2. repec:rje:randje:v:37:y:2006:2:p:300-323 is not listed on IDEAS
  3. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, December.
  4. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-37, May.
  5. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Markets, torts, and social inefficiency," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 300-323, 06.
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