Should Consumers Be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection
30:4 Journal of Law, Economics, and Organization 734 (2014)
42 Pages Posted: 23 Sep 2010 Last revised: 8 Jun 2021
Date Written: March 8, 2013
Abstract
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.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Torts, Expertise and Authority: Liability of Physicians and Managed Care Organizations
By Jennifer Arlen and W. Bentley Macleod
-
Malpractice Liability for Physicians and Managed Care Organizations
By Jennifer Arlen and W. Bentley Macleod
-
Organizational Fragmentation and Care Quality in the U.S. Health Care System
By Randall Cebul, James B. Rebitzer, ...
-
Contracting Over Liability: Medical Malpractice and the Cost of Choice
-
Beyond Master-Servant: A Critique of Vicarious Liability
By Jennifer Arlen and W. Bentley Macleod
-
Vicarious Liability: Relocating Responsibility for the Quality of Medical Care
-
The Tragedy of the Human Commons
By Ronen Avraham and K.a.d. Camara
-
Determining Health Care Rights from Behind a Veil of Ignorance