Chen, Yongmin and Hua, Xinyu (2010): Ex ante Investment, Ex post Remedy, and Product Liability.
Download (263kB) | Preview
Low-quality products may cause consumer harm. A firm can reduce the probability of low quality through ex ante investment before sales, and can take remedy actions such as product recalls if it learns after sales that product quality is low. An increase in the firm's product liability increases its incentive for ex post remedy; more ex post remedy, however, may reduce the firm's ex ante quality investment. On the other hand, higher product liability increases consumer demand for the product, resulting in high output and hence greater return to ex ante investment. The trade-off between these two effects, the "substitution effect" and the "output effect", can lead to an inverted U-shaped relationship between ex ante investment and product liability. We find that the firm always prefers full liability whereas consumers might be better off with less than full liability. Full product liability tends to be socially optimal when the potential consumer loss from low quality is sufficiently high; otherwise partial liability can be socially optimal.
|Item Type:||MPRA Paper|
|Original Title:||Ex ante Investment, Ex post Remedy, and Product Liability|
|Keywords:||Ex ante Investment, Product Recall, Liability|
|Subjects:||K - Law and Economics > K1 - Basic Areas of Law > K13 - Tort Law and Product Liability ; Forensic Economics
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility
|Depositing User:||Xinyu Hua|
|Date Deposited:||13. Apr 2010 02:22|
|Last Modified:||14. Feb 2013 07:40|
Anderson, Eric.T., Karsten Hansen, and Duncan Simester. 2009. "The Option Value of Returns: Theory and Empirical Evidence." Marketing Science (forthcoming).
Bagwell, Kyle and Michael H. Riordan. 1991. "High and Declining Prices Signal Product Quality." 81 American Economic Review 224-239.
Bar-Gill, Oren and Omri Ben-Shahar. 2003. "The Uneasy Case of Comparative Negligence." 5 American Law and Economics Review 433-469.
Brown, John P. 1973. "Toward an Economic Theory of Liability." 2 Journal of Legal Studies 323-349.
Che, Yeon-Koo. 1996. "Customer Return Policies for Experience Goods." 44 Journal of Industrial Economics 17-24.
Cooper, Russell and Thomas W. Ross. 1985. "Prices, Product Qualities, and Asymmetric Information: The Competitive Case." 51 Review of Economic Studies 197-207.
Daughety, Andrew F. and Jennifer F. Reinganum. 1995. "Product Safety: Liability, R&D, and Signaling." 85 American Economic Review 1187-1206.
Daughety, Andrew F. and Jennifer F. Reinganum. 2005. "Secrecy and Safety." 95 American Economic Review 1074-1091.
Daughety, Andrew F. and Jennifer F. Reinganum. 2006. "Market, Torts, and Social Inefficiency." 37 Rand Journal of Economics 300-323.
Daughety, Andrew F. and Jennifer F. Reinganum. 2008. "Imperfect Competition and Quality Signaling." 39 Rand Journal of Economics 163-183.
Daughety, Andrew F. and Jennifer F. Reinganum. 2008. "Communicating Quality: A Unified Model of Disclosure and Signaling." 39 Rand Journal of Economics 973-989.
Emons, Winand. 1990. "Efficient Liability Rules for an Economy with Non-identical Individuals." 42 Journal of Public Economics 89-104.
Emons, Winand and Joel Sobel. 1991. "On the Effectiveness of Liability Rules when Agents are not Identical." 58 Review of Economic Studies 375-390.
Green, Jerry. 1976. "On the Optimal Structure of Liability Rules." 7 Bell Journal of Economics 553-574.
Grossman, Sanford J. 1981. "The Information Role of Warranties and Private Disclosure of Product Quality." 24 Journal of Law and Economics 461-484.
Hartman, Raymond. S. 1987. "Product Quality and Market Efficiency: The Effect of Product Recalls on Resale Prices and Firm Valuation." 69 The Review of Economics and Statistics 367-372.
Hoffer, George E., Stephen W. Pruitt, and Robert J. Reilly. 1988. "The Impact of Product Recalls on the Wealth of Sellers: A Reexamination." 96 Journal of Political Economy 663-670.
Hua, Xinyu. 2009. "Product Recall and Liability." The Journal of Law, Economics, and Organization (forthcoming).
Jarrell, Gregg and Sam Peltzman. 1985. "The Impact of Product Recalls on the Wealth of Sellers." 93 Journal of Political Economy 512-536.
Lutz, Nancy A. 1989. "Warranties as Signals Under Consumer Moral Hazard." 20 Rand Journal of Economics 239-254.
Marino, Anthony M. 1997. "A Model of Product Recalls with Asymmetric Information." 12 Journal of Regulatory Economics 245-265.
Milgrom, Paul R. 1981. "Good News and Bad News: Representation Theorems and Applications." 12 Bell Journal of Economics 380-391.
Moorthy, Sridhar and Kannan Srinivasan. 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs." 14 Marketing Science 442-466.
Polinsky, Mitchell A. and William P. Rogerson. 1983. "Product Liability, Consumer Misperceptions, and Market Power." 14 Bell Journal of Economics 581-589.
Polinsky, Mitchell A. and Steven Shavell. 2007. The Handbook of Law and Economics. The United Kingdom: North-Holland.
Rubinfeld, Daniel L. 1987. "The Efficiency of Comparative Negligence." 16 Journal of Legal Studies 375-394.
Rupp, Nicholas G. and Curtis R. Taylor. 2002. "Who Initiates Recalls and Who Cares? Evidence from the Automobile Industry." 50 The Journal of Industrial Economics 123-149.
Shavell, Steven. 1980. "Strict Liability versus Negligence." 9 Journal of Legal Studies 1-25.
Shavell, Steven. 1994. "Acquisition and Disclosure of Information Prior to Sale." 25 Rand Journal of Economics 20-36.
Simon, Marilyn J. 1981. "Imperfect Information, Costly Litigation, and Product Quality." 12 Bell Journal of Economics 171-184.
Spier, Kathryn. 2009. "Product Safety, Buybacks and The Post-Sale Duty to Warn." The Journal of Law, Economics, and Organization (forthcoming).
Welling, Linda. 1991. "A Theory of Voluntary Recalls and Product Liability." 57 Southern Economic Journal 1092-1111.
Available Versions of this Item
- Ex ante Investment, Ex post Remedy, and Product Liability. (deposited 13. Apr 2010 02:22) [Currently Displayed]