Working Paper: NBER ID: w0937
Authors: A. Mitchell Polinsky; William P. Rogerson
Abstract: This paper compares alternative liability rules for allocating losses from defective products when consumers under- estimate these losses and producers may have some market power. If producers do not have any market power, the rule of strict liability .leads to both the first-best accident probability and industry output. If producers do have some market power, strict liability still leads to the first-best accident probability, but there will now be too little output of the industry. It is shown that if market power is sufficiently large, a negligence rule is preferable. Under this rule, firms can still be induced to choose the first-best accident probability, but now the remaining damages are borne by consumers. Since consumers underestimate these damages, they buy more than under strict liability. However, there is a limit to how much the negligence rule can encourage extra consumption. It is shown that if market power is sufficiently large, the rule of no liability may then be preferred to the negligence rule. Without any liability imposed, producers will not choose the first-best accident probability. However, this may be more than compensated for by the increased output of the industry.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strict liability (K13) | first-best accident probability (C29) |
| lack of market power (D41) | strict liability leads to first-best accident probability (K13) |
| market power increases (L11) | negligence becomes preferable (K13) |
| high market power (D42) | no liability may be favored (K13) |
| shifting liability to consumers (D18) | increased output (E23) |
| consumer misperceptions (D18) | affects demand (J23) |
| consumers overestimate product risks (D18) | strict liability preferred (K13) |
| strict liability (K13) | corrects misperception issue (D91) |
| increased market power (D43) | insufficient industry output (L69) |