Cumulative Harm and Resilient Liability Rules for Product Markets

In the traditional unilateral care model of products liability, expected harm is proportional to usage. Thus, all standard liability regimes yield the efficient choice of care by the firm, independent of the level of usage. This implies that liability for harm can be considered independently of market structure and competition. We find that when expected harm is cumulative (i.e., increasing and convex in usage), then different liability regimes produce different outcomes and yield different implications for social efficiency. Since the responsibilities for product and market performance are divided among relevant agencies and institutions, this presents a challenge to the correct design of rules for agents in the market. We argue for selection among alternative liability regimes based upon what we refer to as "resilience." Strict liability is a resilient policy; no liability and negligence are not resilient. Thus, we provide a new argument for strict liability with respect to product-generated harms. (JEL K13, L13, L15)