Optimal Liability When Consumers Mispredict Product Usage

54 Pages Posted: 17 Jun 2016

See all articles by Andrzej Baniak

Andrzej Baniak

Central European University (CEU) - Department of Economics

Peter Grajzl

Washington and Lee University - Department of Economics; CESifo

Multiple version iconThere are 2 versions of this paper

Date Written: May 19, 2016

Abstract

We contrast alternative liability rules for social control of product risks when heterogeneous consumers considering purchasing a durable good due to cognitive errors and biases mispredict future product benefits and, thus, the extent of future product usage. Since the expected consumer harm directly depends on the level of product usage, the consequences of consumers’ mispredictions vary with the prevailing liability regime. We first characterize the consumers’ purchasing decision and the equilibrium levels of safety and activity from the product’s usage under no liability, strict liability, and negligence rule. We then compare the three legal regimes from the social welfare standpoint. Our analysis clarifies why and how the choice of the socially optimal legal regime depends on the distribution of consumers based on the direction and extent of their mispredictions. When consumers are susceptible to mispredicting future product benefits and usage, the appropriate legal regime is likely product-specific.

Keywords: misprediction, activity, durable consumer products, product risk, liability rules

JEL Classification: K130, D030, D610

Suggested Citation

Baniak, Andrzej and Grajzl, Peter, Optimal Liability When Consumers Mispredict Product Usage (May 19, 2016). CESifo Working Paper Series No. 5903. Available at SSRN: https://ssrn.com/abstract=2795951

Andrzej Baniak

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
(36) 1 327-3231 (Phone)
(36) 1 327-3232 (Fax)

Peter Grajzl (Contact Author)

Washington and Lee University - Department of Economics ( email )

Lexington, VA 24450
United States

HOME PAGE: http://home.wlu.edu/~grajzlp/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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