The Inefficiency of Contractually-Based Liability with Rational Consumers
The prevailing view in the law and economics literature is that preventing firms and consumers from contracting out of mandatory liability rules is optimal only if consumers are irrational or misperceive the risks of the products they buy. In this paper, I show that even if consumers do correctly judge a product's risk, if they cannot directly observe the safety characteristics of that product, then allowing firms and consumers to choose their own liability rules cannot lead firms to make efficient investments in product safety (unless the efficient level of investment is zero). Because the legal system is costly, consumers always have an incentive to waive liability in exchange for a lower price after safety investments are sunk. If they do so, however, firms will anticipate this, thereby undermining there incentive to invest in safety. Mandatory product liability provides a mechanism for consumers and firms to commit not waive liability. Copyright 2006, Oxford University Press.
Volume (Year): 22 (2006)
Issue (Month): 1 (April)
|Contact details of provider:|| Postal: |
Fax: 01865 267 985
Web page: http://jleo.oupjournals.org/
|Order Information:||Web: http://www.oup.co.uk/journals|
When requesting a correction, please mention this item's handle: RePEc:oup:jleorg:v:22:y:2006:i:1:p:168-183. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.