Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market

42 Pages Posted: 24 Mar 2014

See all articles by Eric Helland

Eric Helland

Claremont McKenna College - Robert Day School of Economics and Finance; RAND

Darius Lakdawalla

University of Southern California

Darius N. Lakdawalla

University of Southern California - Schaeffer Center for Health Policy and Economics; RAND Corporation; National Bureau of Economic Research (NBER)

Anup Malani

University of Chicago - Law School; University of Chicago Pritzker School of Medicine; Resources for the Future; National Bureau of Economic Research (NBER)

Seth A. Seabury

University of Southern California - Keck School of Medicine; University of Southern California - Schaeffer Center for Health Policy and Economics

Date Written: March 2014

Abstract

In a complex economy, production is vertical and crosses jurisdictional lines. Goods are often produced by a global or national firm upstream and improved or distributed by local firms downstream. In this context, heightened products liability may have unintended consequences for consumer safety. Conventional wisdom holds that an increase in tort liability on the upstream firm will encourage that firm to improve safety for consumers. However, in the real-world, policy actions in a single jurisdiction may not be significant enough to influence the behavior of an upstream firm that produces for many jurisdictions. Even worse, if liability is shared between upstream and downstream firms, higher upstream liability may decrease the liability of the downstream distributor and encourage it to behave more recklessly. In this manner, higher upstream liability may perversely increase the sales of a risky good. We demonstrate this phenomenon in the context of the pharmaceutical market. We show that higher products liability on upstream pharmaceutical manufacturers reduces the liability faced by downstream doctors, who respond by prescribing more drugs than before.

Suggested Citation

Helland, Eric A. and Lakdawalla, Darius and Lakdawalla, Darius N. and Malani, Anup and Seabury, Seth A., Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market (March 2014). NBER Working Paper No. w20005. Available at SSRN: https://ssrn.com/abstract=2413353

Eric A. Helland (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-7275 (Phone)
909-621-8243 (Fax)

RAND ( email )

1776 Main Street
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Darius Lakdawalla

University of Southern California

Darius N. Lakdawalla

University of Southern California - Schaeffer Center for Health Policy and Economics ( email )

635 Downey Way
Los Angeles, CA 90089-3333
United States

RAND Corporation ( email )

P.O. Box 2138
1700 Main Street
Santa Monica, CA 90407-2138
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Anup Malani

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9602 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/malani/

University of Chicago Pritzker School of Medicine

Chicago, IL 60637
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Seth A. Seabury

University of Southern California - Keck School of Medicine ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

University of Southern California - Schaeffer Center for Health Policy and Economics ( email )

635 Downey Way
Los Angeles, CA 90089-3333
United States

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