Working Paper: NBER ID: w25068
Authors: Alberto Galasso; Hong Luo
Abstract: Liability laws designed to compensate for harms caused by defective products may also affect innovation. We examine this issue by exploiting a major quasi-exogenous increase in liability risk faced by US suppliers of polymers used to manufacture medical implants. Difference-in-differences analyses show that this surge in suppliers’ liability risk had a large and negative impact on downstream innovation in medical implants, but it had no significant effect on upstream polymer patenting. Our findings suggest that liability risk can percolate throughout a vertical chain and may have a significant chilling effect on downstream innovation.
Keywords: Product Liability; Innovation; Medical Implants; Quasi-Exogenous Risk; Patent Analysis
JEL Codes: K13; O31; O32; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| surge in liability risk (K13) | decline in downstream innovation in medical implants (O39) |
| upstream suppliers' decision to withdraw from supplying materials (L14) | decline in downstream innovation in medical implants (O39) |
| decline in downstream innovation in medical implants (O39) | decline in profits and innovation incentives of downstream firms (O31) |
| upstream liability risk (K13) | no significant effect on upstream polymer patenting (O38) |
| upstream suppliers' innovation incentives (O36) | driven by aggregate demand from multiple downstream markets (E20) |