Should Consumers Be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection
Albert H. Choi
University of Virginia School of Law
Kathryn E. Spier
Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)
March 8, 2013
Virginia Law and Economics Research Paper No. 2010-11
Harvard Law and Economics Discussion Paper No. 680
A potentially dangerous product is supplied by a competitive market. The likelihood of a product-related accident depends on the unobservable precautions taken by the manufacturer and on the type of the consumer. Contracts include the price to be paid by the consumer ex ante and stipulated damages to be paid by the manufacturer ex post in the event of an accident. Although the stipulated damage payments are a potential solution to the moral hazard problem, firms have a private incentive to reduce the stipulated damages (and simultaneously lower the up front price) in order to attract the safer consumers who are less costly to serve. The competitive equilibrium - if an equilibrium exists at all - features suboptimally low stipulated damages and correspondingly suboptimal levels of product safety. Imposing tort liability on manufacturers for uncovered accident losses - and prohibiting private parties from waiving that liability - can improve social welfare.
Number of Pages in PDF File: 42
Date posted: September 23, 2010 ; Last revised: March 31, 2015
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