Working Paper: NBER ID: w10972
Authors: Bruce Hay; Kathryn E. Spier
Abstract: Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets then manufacturer liability is not economically efficient. It is more efficient for the consumers themselves to bear responsibility for the harms that they cause. If homogeneous consumers have limited assets, then the most efficient rule is "residual-manufacturer liability" where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be more efficient.
Keywords: manufacturer liability; consumer responsibility; economic efficiency
JEL Codes: K13; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| solvent consumers (L65) | consumer liability is more efficient (K13) |
| solvent consumers (L65) | internalize social costs (D62) |
| internalize social costs (D62) | optimal care (I11) |
| internalize social costs (D62) | optimal demand for safety features (J28) |
| internalize social costs (D62) | efficient market outcomes (G14) |
| insolvent consumers (D12) | residual manufacturer liability becomes optimal (K13) |
| residual manufacturer liability (K13) | manufacturers incentivized to produce safer products (D18) |
| consumer heterogeneity (D19) | residual manufacturer liability distorts market outcomes (L11) |
| residual manufacturer liability distorts market outcomes (L11) | quantity distortions (E31) |
| residual manufacturer liability distorts market outcomes (L11) | potentially inefficient market quantities (D41) |