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Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects

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  • Andrzej Baniak
  • Peter Grajzl

Abstract

We study the problem of torts in a framework where a firm's accident adversely impacts all firms in the industry because of the presence of industry reputation effects. Industry reputation effects lead to interdependence among firms and give rise to strategic firm behavior. We characterize the industry equilibrium and the socially optimal industry configuration in such a setting. We then elucidate how the presence of industry reputation effects and the introduction of a liability regime in the form of a strict liability rule determine whether industry equilibrium is aligned or misaligned with the socially optimal industry configuration. Our results show that both the impact of industry reputation effects and the impact of the strict liability rule are in general contingent on the specifics of the tort problem at hand. In particular, we find that the presence of industry reputation effects can substitute for a suboptimal liability regime and that, in the presence of industry reputation effects, the introduction of the strict liability rule may be detrimental by steering the industry equilibrium away from the socially optimal industry configuration.

Suggested Citation

  • Andrzej Baniak & Peter Grajzl, 2012. "Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects," CEU Working Papers 2012_4, Department of Economics, Central European University, revised 10 Apr 2012.
  • Handle: RePEc:ceu:econwp:2012_4
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    Cited by:

    1. Edward M. Iacobucci, 2014. "On the Interaction between Legal and Reputational Sanctions," The Journal of Legal Studies, University of Chicago Press, vol. 43(1), pages 189-207.
    2. Baniak Andrzej & Grajzl Peter & Joseph Guse A., 2014. "Producer Liability and Competition Policy When Firms Are Bound by a Common Industry Reputation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(4), pages 1-32, October.

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