Posted: 20 Sep 1998
In designing and marketing new products, manufacturers face uncertainty regarding the harmful nature of their products. If harm occurs due to a defective design, liability is imposed on manufacturers whenever the design of the product is determined to be unreasonably dangerous. In assessing the reasonableness of a design, courts often -- although the doctrine is not settled -- admit information which was acquired throughout the actual usage of the product -- information that often was not scientifically available at the time of production. The asbestos litigation is a prominent example of this controversial practice. This paper examines the incentive effects of such hindsight. It demonstrates that the utilization of information that is available ex post but was not available ex ante may lead to adverse incentive effects: (1) in installing safety devices in products; (2) in developing technologies that are less risky; and (3) in investing in research that can identify the risks in advance. Yet, such hindsight unambiguously improves incentives to make safety adjustments subsequent to the distribution of the product. While the overall welfare effect of hindsight is ambiguous, the paper identifies particular circumstances in which hindsight is likely to reduce social welfare. The analysis offers partial justification for some controversial stances taken by the Restatement (Third) of Products Liability.
JEL Classification: K13
Suggested Citation: Suggested Citation
Ben-Shahar, Omri, Should Products Liability be Based on Hindsight?. Journal of Law, Economics, and Organization, Vol. 14, No. 2, Fall 1998. Available at SSRN: https://ssrn.com/abstract=129148