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

  • 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)

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.

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File URL: http://www.coll.mpg.de/pdf_dat/2010_03online.pdf
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Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2010_03.

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Date of creation: Jan 2010
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Handle: RePEc:mpg:wpaper:2010_03
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  15. Endres, A. & Ludeke, A., 1998. "Incomplete strict liability: effects on product differentiation and information provision 1," International Review of Law and Economics, Elsevier, vol. 18(4), pages 511-528, December.
  16. Abraham L. Wickelgren, 2006. "The Inefficiency of Contractually-Based Liability with Rational Consumers," Journal of Law, Economics and Organization, Oxford University Press, vol. 22(1), pages 168-183, April.
  17. R. Lynn Hannan & John H. Kagel & Donald V. Moser, 2002. "Partial Gift Exchange in an Experimental Labor Market: Impact of Subject Population Differences, Productivity Differences, and Effort Requests on Behavior," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 923-951, October.
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