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Should Consumers Be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection

42 Pages Posted: 23 Sep 2010 Last revised: 31 Mar 2015

Albert H. Choi

University of Virginia School of Law

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

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

Choi, Albert H. and Spier, Kathryn E., Should Consumers Be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection (March 8, 2013). Harvard Law and Economics Discussion Paper No. 680. Available at SSRN: https://ssrn.com/abstract=1680932 or http://dx.doi.org/10.2139/ssrn.1680932

Albert H. Choi (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Kathryn E. Spier

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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