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Secrecy and Safety

Author

Listed:
  • Andrew F. Daughety
  • Jennifer F. Reinganum

Abstract

We provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness. A rational risk-neutral consumer's response in a market, wherein a firm engages in confidential settlements, may be to reduce demand. A firm committed to openness incurs higher liability and R&D costs, though product demand is not diminished. We identify conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm prefers to eschew confidentiality.

Suggested Citation

  • Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Secrecy and Safety," American Economic Review, American Economic Association, vol. 95(4), pages 1074-1091, September.
  • Handle: RePEc:aea:aecrev:v:95:y:2005:i:4:p:1074-1091
    Note: DOI: 10.1257/0002828054825673
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    References listed on IDEAS

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    1. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
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    3. 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.
    4. Andrew F. Daughety & Jennifer F. Reinganum, 1999. "Hush Money," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 661-678, Winter.
    5. repec:hoo:wpaper:e-91-11 is not listed on IDEAS
    6. 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, vol. 20(7), pages 907-930, September.
    7. 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.
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    11. Yang, Bill Z., 1996. "Litigation, experimentation, and reputation," International Review of Law and Economics, Elsevier, vol. 16(4), pages 491-502, December.
    12. Laurent Linnemer, 1998. "Entry Deterrence, Product Quality: Price and Advertising as Signals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 615-645, December.
    13. Mark N. Hertzendorf & Per Baltzer Overgaard, 2001. "Price Competition and Advertising Signals: Signaling by Competing Senders," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 621-662, December.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Dessí, Roberta, 2009. "Contractual Execution, Strategic Incompleteness and Venture Capital," CEPR Discussion Papers 7413, C.E.P.R. Discussion Papers.
    2. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Communicating quality: a unified model of disclosure and signalling," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 973-989.
    3. Giuseppe Dari-Mattiacci & Bruno Deffains, 2007. "Uncertainty of Law and the Legal Process," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(4), pages 627-656, December.
    4. Lam, Wing Man Wynne, 2014. "Ex Ante and Ex Post Investments in Cybersecurity," TSE Working Papers 14-519, Toulouse School of Economics (TSE).
    5. Daughety, Andrew F. & Reinganum, Jennifer F., 2007. "Competition and confidentiality: Signaling quality in a duopoly when there is universal private information," Games and Economic Behavior, Elsevier, vol. 58(1), pages 94-120, January.
    6. Janssen, Maarten C.W. & Roy, Santanu, 2010. "Signaling quality through prices in an oligopoly," Games and Economic Behavior, Elsevier, vol. 68(1), pages 192-207, January.
    7. S. Ho, 2008. "Extracting the information: espionage with double crossing," Journal of Economics, Springer, vol. 93(1), pages 31-58, February.
    8. Daher, Wassim & Mirman, Leonard J. & Santugini, Marc, 2012. "Information in Cournot: Signaling with incomplete control," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 361-370.
    9. Anthony Creane & Thomas D. Jeitschko, 2016. "Endogenous Entry in Markets with Unobserved Quality," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 494-519, September.
    10. Choi, Jay Pil & Peitz, Martin, 2016. "You are judged by the company you keep : reputation leverage in vertically related markets," Working Papers 16-07, University of Mannheim, Department of Economics.
    11. Baumann, Florian & Friehe, Tim, 2016. "Learning-by-doing in torts: Liability and information about accident technology," Economics Letters, Elsevier, vol. 138(C), pages 1-4.
    12. Belleflamme, Paul & Peitz, Martin, 2014. "Asymmetric information and overinvestment in quality," European Economic Review, Elsevier, vol. 66(C), pages 127-143.
    13. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Imperfect competition and quality signalling," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 163-183.
    14. A. Mitchell Polinsky & Steven Shavell, 2012. "Mandatory Versus Voluntary Disclosure of Product Risks," Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(2), pages 360-379.
    15. Dan Levin & James Peck & Lixin Ye, 2009. "QUALITY DISCLOSURE AND COMPETITION -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 167-196, March.
    16. Mirman, Leonard J. & Salgueiro, Egas M. & Santugini, Marc, 2014. "Noisy signaling in monopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 504-511.
    17. Lam, W., 2015. "Attack-Deterring and Damage-Control Investments in Cybersecurity," CORE Discussion Papers 2015023, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    18. Bruno Deffains & Claude Fluet, 2013. "Legal Liability when Individuals Have Moral Concerns," Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(4), pages 930-955, August.

    More about this item

    JEL classification:

    • K0 - Law and Economics - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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