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Products Liability, Signaling and Disclosure

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  • Andrew F. Daughety
  • Jennifer F. Reinganum

Abstract

We examine the behavior of a firm that produces a product with a privately-observed safety attribute. Costly disclosure and price-signaling of safety are alternative firm strategies. The liability system and production cost determine the firm's full marginal cost. When the firm's full marginal cost is increasing (decreasing) in safety, a firm with a safer product will distort its price upward (downward) and will sometimes inefficiently choose to signal rather than disclose (to disclose rather than signal). We also allow for a small fraction of naively optimistic (pessimistic) consumers; this leads to less price distortion and decreased (increased) incentives to disclose.

Suggested Citation

  • Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Products Liability, Signaling and Disclosure," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 106-126, March.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200803)164:1_106:plsad_2.0.tx_2-i
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    References listed on IDEAS

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    1. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, pages 1187-1206.
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    9. Mark N. Herzendorf & Per Baltzer Overgaard, 2001. "Prices as Signals of Quality in Duopoly," CIE Discussion Papers 2001-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
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    Citations

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    Cited by:

    1. Baumann, Florian & Friehe, Tim & Rasch, Alexander, 2015. "The influence of product liability on vertical product differentiation," DICE Discussion Papers 182, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Kenneth S. Corts, 2013. "Prohibitions on False and Unsubstantiated Claims: Inducing the Acquisition and Revelation of Information through Competition Policy," Journal of Law and Economics, University of Chicago Press, vol. 56(2), pages 453-486.
    3. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2010. "Worried about Adverse Product Effects? Information Disclosure and Consumer Awareness," TSE Working Papers 10-157, Toulouse School of Economics (TSE).
    4. Florian Baumann & Tim Friehe & Kristoffel Grechenig, 2010. "Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_03, Max Planck Institute for Research on Collective Goods.
    5. Andrew F. Daughety & Jennifer F. Reinganum, 2013. "Economic analysis of products liability: Theory," Chapters,in: Research Handbook on the Economics of Torts, chapter 3, pages 69-96 Edward Elgar Publishing.
    6. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    7. Yeon-Koo Che, 2008. "Products Liability, Signaling and Disclosure. Comment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 127-129, March.
    8. Tim Friehe, 2014. "Tacit collusion and liability rules," European Journal of Law and Economics, Springer, vol. 38(3), pages 453-469, December.
    9. Baumann, Florian & Friehe, Tim & Grechenig, Kristoffel, 2011. "A note on the optimality of (even more) incomplete strict liability," International Review of Law and Economics, Elsevier, vol. 31(2), pages 77-82, June.
    10. 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.
    11. Janssen, Maarten, 2017. "Regulating False Discloure," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168159, Verein für Socialpolitik / German Economic Association.
    12. Christoph Engel & Urs Schweizer, 2008. "Editorial Preface," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 1-3, March.
    13. Florian Baumann & Tim Friehe, 2010. "Product liability and the virtues of asymmetric information," Journal of Economics, Springer, vol. 100(1), pages 19-32, May.
    14. Andrew F. Daughety & Jennifer F. Reinganum, 2013. "Economic analysis of products liability: Theory," Chapters,in: Research Handbook on the Economics of Torts, chapter 3, pages 69-96 Edward Elgar Publishing.

    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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