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Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability

Author

Listed:
  • Florian Baumann

    (Eberhard Karls University, Department of Economics)

  • Tim Friehe

    (University of Konstanz, Department of Economics)

  • Kristoffel Grechenig

    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

This article shows that it may be socially optimal to grant accident victims less than full compensation. In our framework, firms are liable under product liability but also invest in care to prevent consumers switching to competitors. Affecting the partition of consumers by means of care-taking is not desirable from a social standpoint. Consequently, it may be optimal to reduce liability below full compensation in order to adjust firms’ care incentives.

Suggested Citation

  • Florian Baumann & Tim Friehe & Kristoffel Grechenig, 2010. "Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2010_03, Max Planck Institute for Behavioral Economics.
    • Handle: RePEc:mpg:wpaper:2010_03
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    References listed on IDEAS

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    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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