Product Safety, Contracts, and Liability
47 Pages Posted: 24 Jun 2018 Last revised: 6 Aug 2019
Date Written: August 4, 2019
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: Suggested Citation