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Markets, Torts, and Social Inefficiency

Author

Listed:
  • Andrew F. Daughety

    (Vanderbilt University)

  • Jennifer F. Reinganum

    (Vanderbilt University)

Abstract

We provide a model wherein oligopolists produce differentiated products that also have a safety attribute. Consumption of these products may lead to harm (to consumers and/or third parties), lawsuits, and compensation, either via settlement or trial. Firm-level costs reflect both safety investment and production activities, as well as liability-related costs. Compensation is incomplete, both because of inefficiencies in the bargaining process and (possibly) because of statutorily established limits on awards. We compare the market equilibrium safety effort and output levels to what a planner who is able to set safety standards, but takes the market equilibrium output as given, would choose.

Suggested Citation

  • Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Markets, Torts, and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 37(2), pages 300-323, Summer.
    • Handle: RePEc:rje:randje:v:37:y:2006:2:p:300-323
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    Cited by:

    1. Eric Langlais & Andreea Cosnita-Langlais & Tim Friehe, 2024. "Product Liability Influences Incentives for Horizontal Mergers," EconomiX Working Papers 2024-10, University of Paris Nanterre, EconomiX.
    2. John Stranlund & Jeffrey Wagner, 2023. "Tort reform and contingent incomplete liability," Economics Bulletin, AccessEcon, vol. 43(4), pages 1718-1729.

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