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Product Safety: Liability, R & D and Signaling

  • Daughety, Andrew
  • Reinganum, Jennifer

The authors develop a monopoly model of product design and safety signaling incorporating a parametric liability specification. The firm first engages in R&D to affect the safety of its product. Since the outcome of R&D trials is unobservable to consumers, the firm then chooses its price, understanding that consumers may draw inferences from the price about the product's safety. Consumers acquire and use the product; injuries lead to losses which are allocated by the liability system. The authors vary the liability system's allocation of losses and trace out the implications for R&D investment and the price-safety relationship. Copyright 1995 by American Economic Association.

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Paper provided by University of Iowa, Department of Economics in its series Working Papers with number 94-17.

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Date of creation: 1992
Date of revision: 1994
Handle: RePEc:uia:iowaec:94-17
Contact details of provider: Postal: University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242
Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/

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  1. Riordan, Michael H, 1986. "Monopolistic Competition with Experience Goods," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 265-79, May.
  2. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  3. Russell Cooper & Thomas W. Ross, 1984. "Monopoly Provision of Product Quality with Uninformed Buyers," Cowles Foundation Discussion Papers 688R, Cowles Foundation for Research in Economics, Yale University, revised Nov 1984.
  4. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
  5. Peter A. Diamond, 1974. "Single Activity Accidents," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 107-164, January.
  6. Franklin Allen, 1984. "Reputation and Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 311-327, Autumn.
  7. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  8. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  9. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  10. Shiou Shieh, 1993. "Incentives for Cost-Reducing Investment in a Signalling Model of Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 466-477, Autumn.
  11. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  12. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 499-516, October.
  13. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March.
  14. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer.
  15. Png, I. P. L., 1987. "Litigation, liability, and incentives for care," Journal of Public Economics, Elsevier, vol. 34(1), pages 61-85, October.
  16. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
  17. Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Marilyn J. Simon, 1981. "Imperfect Information, Costly Litigation, and Product Quality," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 171-184, Spring.
  19. Polinsky, A. Mitchell & Rubinfeld, Daniel L., 1988. "The deterrent effects of settlements and trials," International Review of Law and Economics, Elsevier, vol. 8(1), pages 109-116, June.
  20. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
  21. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
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