Liability and manufacturer warnings

Liability for damages can motivate manufacturers to warn about dangerous products. However, there are two effects that can distort such incentives; the 'signaling effect' and the 'security effect'. The signaling effect tempts producers to warn too infrequently, out of a fear that demand will be adversely affected by warnings. The security effect, in contrast, disposes producers to warn too often, when warnings reduce exposure to liability. When manufacturers are exculpated from liability for warning, efficiency is more difficult to achieve than under strict liability. In particular, the signaling effect dominates when awarded damages are purely compensatory.