Secrecy and Safety
We employ a simple two-period model to show that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average product safety than that which would be produced if a firm were committed to openness. Moreover, confidentiality can even lead to declining average product safety over time. We also show that a rational risk-neutral consumer's response to a market environment, wherein a firm engages in confidential settlement agreements, may be to reduce demand. We discuss how firm profitability is influenced by the decision to have open or confidential settlements; all else equal, a firm following a policy of openness will pay higher equilibrium wages and incur higher training costs, though product demand will not be diminished (as it may be for a firm employing confidentiality). Further, we characterize the choice of regime, providing conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm will choose to pay for auditing and eschew confidentiality.
|Date of creation:||Aug 2003|
|Date of revision:||Sep 2003|
|Contact details of provider:|| Web page: http://www.vanderbilt.edu/econ/wparchive/index.html|
References listed on IDEAS
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- Bagwell, Kyle, 1992. "Pricing to Signal Product Line Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 151-174, Spring.
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- repec:hoo:wpaper:e-91-11 is not listed on IDEAS
- Mark N. Hertzendorf, 1993. "I'm Not a High-Quality Firm -- But I Play One on TV," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 236-247, Summer. Full references (including those not matched with items on IDEAS)
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