Product Safety, Contracts, and Liability
40 Pages Posted: 24 Jun 2018
Date Written: June 6, 2018
A firm sells a dangerous product to a population of heterogeneous consumers. Higher consumer types enjoy higher gross benefits from product use but suffer accidents more often. 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 in product safety. When the consumer's net benefit function is increasing in consumer type, the firm contractually disclaims liability for accident losses and under-invests in product safety. 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