Working Paper: CEPR ID: DP13036
Authors: Alberto Galasso; Hong Luo
Abstract: Liability laws designed to compensate for harms caused by defective products may also affect innovation incentives. This paper examines this issue, exploiting a major quasi-exogenous increase in liability risk faced by US suppliers of polymers used to manufacture medical devices implanted in human bodies. Difference-in-differences analyses suggest that the surge in liability risk had a large and negative impact on downstream innovation in medical implants but no significant effect on upstream polymer patenting. These findings show how tort laws may affect the development of new technologies and how liability risk may percolate through an industry's vertical chain.
Keywords: product liability; innovation; tort; medical devices; vertical foreclosure
JEL Codes: O31; O32; O34; K13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased liability risk (K13) | reduced innovation (O39) |
| increased liability risk (K13) | foreclosure of risky downstream market (G33) |
| reduced innovation (O39) | decline in patenting activities for medical implants (O39) |
| increased liability risk (K13) | no significant negative impact on upstream innovation in polymers (L65) |
| patenting activities for medical implants post-1990 (O34) | significant drop (E32) |