Product Liability versus Reputation

17 Pages Posted: 16 Jan 2012

See all articles by Juan-José Ganuza

Juan-José Ganuza

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Fernando Gomez-Pomar

Universitat Pompeu Fabra

Marta Robles

Instituto Tecnológico Autónomo de México (ITAM)

Date Written: November 1, 2011

Abstract

The Tort system and especially Product Liability is a socially costly tool to provide manufacturers with incentives for safety. Recently, it has been argued that market reputation could, to a significant extent, constitute a cheaper alternative to Product Liability. Our paper departs from the sometimes overlooked fact that market reputation is not for free, but requires to implement "market sanctioning" mechanisms that are costly for consumers and manufacturers. We show that Product Liability positively affects the functioning of manufacturer's market reputation by reducing its costs. Thus, to an important extent, reputation and Product Liability are not substitutes but complements. We also specifically show the effects of different relevant legal policies in Product Liability, and namely that negligence reduces reputational costs more intensely than strict liability, and that legal and Court errors in determining liability interfere with the reputational cost reduction function of Product Liability.

Keywords: Reputation, Relational Contracts, Product Liability and Consumer Protection

JEL Classification: K13, K23, L51, H24

Suggested Citation

Ganuza, Juan and Gomez-Pomar, Fernando and Robles, Marta, Product Liability versus Reputation (November 1, 2011). Available at SSRN: https://ssrn.com/abstract=1986237 or http://dx.doi.org/10.2139/ssrn.1986237

Juan Ganuza (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 19 (Phone)
(34-98) 542 17 46 (Fax)

Fernando Gomez-Pomar

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
08005 Barcelona
Spain
(34-93) 542 16 47 (Phone)
(34-93) 542 17 31 (Fax)

Marta Robles

Instituto Tecnológico Autónomo de México (ITAM) ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

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