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Should Consumers be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection

Author

Listed:
  • Albert H. Choi
  • Kathryn E. Spier

Abstract

A potentially dangerous product is supplied by a competitive market. The likelihood of a product-related accident depends on the unobservable precautions taken by the manufacturer and on the risk type of the consumer. Contracts include the price to be paid by the consumer ex ante and stipulated damages to be paid by the firm ex post in the event of an accident. Although the stipulated damage payments are a potential solution to the moral hazard problem, firms have a private incentive to reduce the stipulated damages (and simultaneously lower the up front price) in order to attract the safer consumers who are less costly to serve. The competitive equilibrium—if an equilibrium exists at all—features suboptimally low stipulated damages and correspondingly suboptimal levels of product safety. Imposing some degree of tort liability on firms for uncovered accident losses—and prohibiting private parties from waiving that liability—can improve social welfare. (JEL K13, K12, L15, D82, D86).

Suggested Citation

  • Albert H. Choi & Kathryn E. Spier, 2014. "Should Consumers be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(4), pages 734-766.
  • Handle: RePEc:oup:jleorg:v:30:y:2014:i:4:p:734-766.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewt019
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    Citations

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    Cited by:

    1. Baumann, Florian, 2015. "Freier Warenverkehr und unverfälschter Wettbewerb in der Europäischen Union: Der Beitrag der europäischen Produkthaftung," DICE Ordnungspolitische Perspektiven 75, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Tsvetanov, Tsvetan & Miceli, Thomas J. & Segerson, Kathleen, 2021. "Products liability with temptation bias," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 76-93.
    3. Yassine Lefouili & Leonardo Madio, 2022. "The economics of platform liability," European Journal of Law and Economics, Springer, vol. 53(3), pages 319-351, June.
    4. Andrea Castellano & Fernando Tohmé & Omar O. Chisari, 2020. "Product liability under ambiguity," European Journal of Law and Economics, Springer, vol. 49(3), pages 473-487, June.
    5. Florian Baumann & Tim Friehe & Alexander Rasch, 2015. "The Influence of Product Liability on Vertical Product Differentiation," CESifo Working Paper Series 5315, CESifo.
    6. Baumann, Florian & Friehe, Tim & Rasch, Alexander, 2016. "Why product liability may lower product safety," Economics Letters, Elsevier, vol. 147(C), pages 55-58.
    7. Miriam C. Buiten, 2024. "Product liability for defective AI," European Journal of Law and Economics, Springer, vol. 57(1), pages 239-273, April.
    8. Florian Baumann & Tim Friehe & Alexander Rasch, 2018. "Product Liability in Markets for Vertically Differentiated Products," American Law and Economics Review, American Law and Economics Association, vol. 20(1), pages 46-81.
    9. Seshimo, Hiroyuki, 2020. "A justification for caveat emptor in the secondhand market: Risk transfer, enforcement cost and insurance," Economic Analysis and Policy, Elsevier, vol. 66(C), pages 217-235.
    10. Tim Friehe & Eric Langlais & Elisabeth Schulte, 2022. "Firm Liability When Third Parties and Consumers Incur Cumulative Harm," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 81(1), pages 53-71, January.
    11. Rosa Ferrer Zarzuela & Helena Perrone, 2017. "Consumers’ costly responses to product-harm crises," Economics Working Papers 1571, Department of Economics and Business, Universitat Pompeu Fabra.
    12. Andrzej Baniak & Peter Grajzl, 2016. "Controlling Product Risks when Consumers Are Heterogeneously Overconfident: Producer Liability versus Minimum-Quality-Standard Regulation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 274-304, June.
    13. De Chiara, Alessandro & Elizalde, Idoia & Manna, Ester & Segura-Moreiras, Adrian, 2021. "Car accidents in the age of robots," International Review of Law and Economics, Elsevier, vol. 68(C).
    14. Baumann, Florian & Rasch, Alexander, 2020. "Product liability and reasonable product use," ZEW Discussion Papers 20-071, ZEW - Leibniz Centre for European Economic Research.
    15. Andrzej Baniak & Peter Grajzl, 2014. "Controlling Product Risks when Consumers are Heterogeneously Overconfident: Producer Liability vs. Minimum Quality Standard Regulation," CESifo Working Paper Series 5003, CESifo.
    16. Rosa Ferrer & Helena Perrone, 2023. "Consumers’ Costly Responses to Product-Harm Crises," Management Science, INFORMS, vol. 69(5), pages 2639-2671, May.

    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • 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
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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