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Does Accuracy Improve the Information Value of Trials?

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  • Scott A. Baker
  • Anup Malani

Abstract

We develop a model where products liability trials provide information to consumers who are not parties to the litigation. Consumers use this information to take precautions against dangerous products. A critical assumption is that consumers cannot differentiate between firms that have never been sued and firms that have been sued but settled out of court. In this framework, we show that perfectly accurate courts do not maximize information to consumers and thus welfare, contrary to Kaplow and Shavell (1994). More accurate courts provide more information only if producers go to trial. Greater accuracy, however, encourages producers of dangerous products to settle and hide their type. When courts are perfectly accurate, all low quality producers settle. And given the lack of any information from trials about bad types, consumers (rationally) fail to take precautions. If consumer precautions are relatively more efficient than producer precautions, our conclusion stands even when firms can invest in improving the safety of their products.

Suggested Citation

  • Scott A. Baker & Anup Malani, 2011. "Does Accuracy Improve the Information Value of Trials?," NBER Working Papers 17036, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17036
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    File URL: http://www.nber.org/papers/w17036.pdf
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    1. Baker, Scott & Mezzetti, Claudio, 2001. "Prosecutorial Resources, Plea Bargaining, and the Decision to Go to Trial," Journal of Law, Economics, and Organization, Oxford University Press, vol. 17(1), pages 149-167, April.
    2. Anup Malani & Ramanan Laxminarayan, 2011. "Incentives for Reporting Infectious Disease Outbreaks," Journal of Human Resources, University of Wisconsin Press, vol. 46(1), pages 176-202.
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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.

    More about this item

    JEL classification:

    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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