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Product Safety: Liability, R&D and Signaling

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Author Info
Andrew F. Daughety (Economics)
Jennifer F. Reinganum (Univ. of Iowa)

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Abstract

This paper develops a two-stage model of product design and safety signaling incorporating a parametric liability specification in a monopoly context. In the first stage, the firm engages in research and development in order to determine the safety of its product. We model the research and development process as sequential sampling from a fixed distribution of potential safety levels. Thus, R&D is a stochastic process, partially controlled by investment, which ultimately yields an equilibrium set of acceptable safety levels. Since the outcome of research and development trials is unobservable to consumers, in the second stage of the model the firm must choose its price with the understanding that consumers may attempt to draw inferences about the product's safety from the firm's pricing behavior. Given the price, consumers infer the level of safety and choose the amount of the product to acquire; injuries then lead to losses which are allocated by the particular liability system in place. We vary the liability system's allocation

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Paper provided by EconWPA in its series Game Theory and Information with number 9403007.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 21 pages
Date of creation: 29 Mar 1994
Date of revision: 30 Mar 1994
Handle: RePEc:wpa:wuwpga:9403007

Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 1 file -- Prodsafe.941 (body in WP5.1, 21 pages)
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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

References listed on IDEAS
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  11. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February. [Downloadable!] (restricted)
  12. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March. [Downloadable!] (restricted)
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  18. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March. [Downloadable!] (restricted)
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  19. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August. [Downloadable!] (restricted)
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  20. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Blackwell Publishing, vol. 51(2), pages 197-207, April. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J.-C. Bureau & E. Gozlan & S. Marette, 1999. "Quality signaling and international trade in food products," THEMA Working Papers 99-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
    Other versions:
  2. Carriquiry, Miguel A. & Babcock, Bruce A., 2004. "Reputation, Quality Observability, and the Choice of Quality Assurance Systems," Staff General Research Papers 12038, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  3. Marette, Stéphan, 2007. "Minimum Safety Standard, Consumers’ Information, and Competition (The)," Staff General Research Papers 12718, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  4. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Products Liability, Signaling and Disclosure," Working Papers 0625, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  5. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Secrecy and Safety," Working Papers 0317, Department of Economics, Vanderbilt University, revised Sep 2003. [Downloadable!]
    Other versions:
  6. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Working Papers 0703, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  7. Bruce Hay & Kathryn E. Spier, 2005. "Manufacturer Liability for Harms Caused by Consumers to Others," American Economic Review, American Economic Association, vol. 95(5), pages 1700-1711, December. [Downloadable!]
  8. Gonzalez, Patrick, 2002. "Investment and Screening under Asymmetric Endogenous Information," Cahiers de recherche 0201, GREEN. [Downloadable!]
    Other versions:
  9. Palumbo, Giuliana & Iossa, Elisabetta, 2002. "Lender liability in the Consumer Credit Market," Economics Working Papers (Ensaios Economicos da EPGE) 451, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  10. Chris William Sanchirico, 2004. "Relying on the Information of Interested--and Potentially Dishonest--Parties," Law and Economics 0403001, EconWPA. [Downloadable!]
  11. Stéphan Marette, 2007. "Minimum safety standard, consumers’ information and competition," Journal of Regulatory Economics, Springer, vol. 32(3), pages 259-285, December. [Downloadable!] (restricted)
  12. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Hidden Talents: Partnerships with Pareto-Improving Private Information," Working Papers 0613, Department of Economics, Vanderbilt University. [Downloadable!]
  13. Chris Sanchirico & George Triantis, . "Evidence Arbitrage: The Fabrication of Evidence and the Verifiability of Contract Performance," Scholarship at Penn Law upenn_wps-1005, University of Pennsylvania Law School. [Downloadable!]
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  14. Frenzen, Paul D. & Buzby, Jean C. & Rasco, Barbara, 2001. "Product Liability And Microbial Foodborne Illness," Agricultural Economics Reports 34059, United States Department of Agriculture, Economic Research Service. [Downloadable!]
  15. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Markets, Torts and Social Inefficiency," Working Papers 0308, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  16. Auriol, Emmanuelle & Schilizzi, Steven, 2003. "Quality Signaling through Certification. Theory and an Application to Agricultural Seed Market," IDEI Working Papers 165, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  17. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Imperfect Competition and Quality Signaling," Working Papers 0520, Department of Economics, Vanderbilt University. [Downloadable!]
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  18. Dinopoulos, Elias & Livanis, Grigorios & West, Carol, 2005. "How Cool is C.O.O.L.?," Working Papers 15658, University of Florida, International Agricultural Trade and Policy Center. [Downloadable!]
  19. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Working Papers 0417, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  20. Bruce Hay & Kathryn E. Spier, 2004. "Manufacturer Liability for Harms Caused by Consumers to Others," NBER Working Papers 10972, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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