Product Liability and Moral Hazard: Evidence from General Aviation

Abstract:     
Product liability law reduces the costs of accidents to consumers thus reducing their incentive to invest in safety. We estimate the impact of tort liability on a subset of consumers who have significant control over the probability of an accident, the consumers of general aviation aircraft. The General Aviation Revitalization Act of 1994 exempted small aircraft manufacturers from product-liability claims when they reached 18 years of age. We use the exemption at age 18 to estimate the impact of tort liability on accidents as well as on a wide variety of behaviors and safety investments by pilots and owners. The results are consistent with moral hazard. As an aircraft is exempted from tort liability, the robability that the aircraft is involved in an accident declines. Direct evidence on pilot and owner behavior is also consistent with moral hazard. Aircraft exempted from tort liability are flown less often and flown less often at night than similar aircraft that are covered. Pilots and owners of exempted aircraft also increase their personal investments in safety, including wearing seat belts and filing flight plans, relative to pilots and owners whose aircraft are still covered by liability.

Number of Pages in PDF File: 42

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