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Manufacturer Liability for Harms Caused by Consumers to Others

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  • Bruce Hay
  • Kathryn E. Spier

Abstract

Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets then manufacturer liability is not economically efficient. It is more efficient for the consumers themselves to bear responsibility for the harms that they cause. If homogeneous consumers have limited assets, then the most efficient rule is "residual-manufacturer liability" where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be more efficient.

Suggested Citation

  • Bruce Hay & Kathryn E. Spier, 2004. "Manufacturer Liability for Harms Caused by Consumers to Others," NBER Working Papers 10972, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10972
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    References listed on IDEAS

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    1. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
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    4. Roland N. McKean, 1970. "Products Liability: Implications of Some Changing Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 84(4), pages 611-626.
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    6. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-359, March.
    7. Hamada, Koichi, 1976. "Liability Rules and Income Distribution in Product Liability," American Economic Review, American Economic Association, vol. 66(1), pages 228-234, March.
    8. Michael Spence, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 561-572.
    9. Mattiacci, Giuseppe Dari & Parisi, Francesco, 2003. "The cost of delegated control: vicarious liability, secondary liability and mandatory insurance," International Review of Law and Economics, Elsevier, vol. 23(4), pages 453-475, December.
    10. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-367, May.
    11. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
    12. Doughety, Andrew F & Reinganum, Jennifer F, 1997. "Everybody Out of the Pool: Products Liability, Punitive Damages, and Competition," Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(2), pages 410-432, October.
    13. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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