Product Safety, Contracts, and Liability

47 Pages Posted: 24 Jun 2018 Last revised: 6 Aug 2019

See all articles by Xinyu Hua

Xinyu Hua

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Kathryn E. Spier

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

Date Written: August 4, 2019

Abstract

A firm sells a dangerous product to heterogeneous consumers. Higher consumer types suffer accidents more often but may enjoy higher gross benefits. The firm invests resources to reduce the frequency of accidents. When the consumer's net benefit function (gross benefits minus expected harms) is decreasing in consumer type, the firm contractually accepts liability for accident losses and invests efficiently. When the consumer's net benefit function is increasing in consumer type, the firm contractually disclaims liability and under-invests. Legal interventions, including products liability and limits on contractual waivers and disclaimers, are necessary to raise the level of product safety.

Keywords: contracts, product safety, liability, quality, warranty, mechanism design

JEL Classification: K12, K13, L12, L15

Suggested Citation

Hua, Xinyu and Spier, Kathryn E., Product Safety, Contracts, and Liability (August 4, 2019). Harvard Public Law Working Paper No. 18-36, RAND Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3192594 or http://dx.doi.org/10.2139/ssrn.3192594

Xinyu Hua

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Kathryn E. Spier (Contact Author)

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
127
Abstract Views
969
rank
250,949
PlumX Metrics