Liability or Labeling? Regulating Product Risks with Costly Consumer Attention
35 Pages Posted: 24 Sep 2014 Last revised: 19 Aug 2018
Date Written: August 10, 2018
This paper examines the liability and labeling approaches to regulating product safety. Stronger product liability increases producer care, which then has a negative lulling effect on consumer attention to warning labels. By contrast, more visible warning labels increase such consumer care, which then has a positive vigilance effect on producer care. Information campaigns educating consumers about product risks generate a similar vigilance effect. This happens because consumers view producer care and consumer care levels as strategic substitutes, while the firm views them as strategic complements. We argue that when a public policy is chosen, the endogeneity of consumer attention to warnings is not to be overlooked.
Keywords: warning labels, search, disclosure, product liability
JEL Classification: K13, L15, L13, D83
Suggested Citation: Suggested Citation