Product Safety: Liability, R&D and Signaling
This paper develops a two-stage model of product design and safety signaling incorporating a parametric liability specification in a monopoly context. In the first stage, the firm engages in research and development in order to determine the safety of its product. We model the research and development process as sequential sampling from a fixed distribution of potential safety levels. Thus, R&D is a stochastic process, partially controlled by investment, which ultimately yields an equilibrium set of acceptable safety levels. Since the outcome of research and development trials is unobservable to consumers, in the second stage of the model the firm must choose its price with the understanding that consumers may attempt to draw inferences about the product's safety from the firm's pricing behavior. Given the price, consumers infer the level of safety and choose the amount of the product to acquire; injuries then lead to losses which are allocated by the particular liability system in place. We vary the liability system's allocation
|Date of creation:||29 Mar 1994|
|Date of revision:||30 Mar 1994|
|Note:||Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 1 file -- Prodsafe.941 (body in WP5.1, 21 pages)|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul R. Milgrom & John Roberts, 1984.
"Price and Advertising Signals of Product Quality,"
Cowles Foundation Discussion Papers
709, Cowles Foundation for Research in Economics, Yale University.
- Michael Spence, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 561-572.
- 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.
- Cooper, Russell & Ross, Thomas W., 1985. "Monopoly provision of product quality with uninformed buyers," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 439-449, December.
- 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.
- 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.
- 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.
- Franklin Allen, 1984. "Reputation and Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 311-327, Autumn.
- 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.
- Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
- Png, I. P. L., 1987. "Litigation, liability, and incentives for care," Journal of Public Economics, Elsevier, vol. 34(1), pages 61-85, October.
- 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.
- 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.
- Russell Cooper & Thomas W. Ross, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Oxford University Press, vol. 51(2), pages 197-207.
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
- P. A. Diamond, 1973.
"Single Activity Accidents,"
113, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
- Yuk-Shee Chan & Hayne Leland, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 499-516.
- Michael H. Riordan, 1986. "Monopolistic Competition with Experience Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 265-279.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpga:9403007. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.