The Effects of Product Liability Exemption in the Presence of the Fda

41 Pages Posted: 28 Dec 2009 Last revised: 2 Jun 2013

See all articles by Tomas Philipson

Tomas Philipson

University of Chicago; National Bureau of Economic Research (NBER)

Eric C. Sun

University of Chicago

Dana P. Goldman

RAND Corporation; National Bureau of Economic Research (NBER)

Date Written: December 2009

Abstract

In the United States, drugs are jointly regulated by the US Food and Drug Administration, which oversees premarket clinical trials designed to ensure drug safety and efficacy, and the liability system, which allows patients to sue manufacturers for unsafe drugs. In this paper, we examine the potential welfare effects of this dual system aimed at ensuring the safety of medical products, and conclude that product liability exemptions for FDA regulated activities could raise economic efficiency. We show that while reductions in liability, such those associated with pre-emption, may lower welfare in the absence of the FDA, they may raise welfare in its presence. In the presence of the FDA, product liability may reduce efficiency by raising prices without pushing firms, who are already bound by the agency's requirements, to invest further in product safety. We consider as a case study the National Vaccine Injury Compensation Program, which sharply reduced vaccine manufacturer's liability in 1988. We find evidence that the program reduced prices without affecting vaccine safety, suggesting that liability reductions can enhance economic efficiency in the presence of the FDA.

Suggested Citation

Philipson, Tomas J. and Sun, Eric C. and Goldman, Dana P., The Effects of Product Liability Exemption in the Presence of the Fda (December 2009). NBER Working Paper No. w15603. Available at SSRN: https://ssrn.com/abstract=1528026

Tomas J. Philipson (Contact Author)

University of Chicago ( email )

Graduate School of Business
1101 East 58th Street
Chicago, 60637

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric C. Sun

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Dana P. Goldman

RAND Corporation ( email )

P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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