Product Safety, Contracts, and Liability

40 Pages Posted: 24 Jun 2018  

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: June 6, 2018

Abstract

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

Hua, Xinyu and Spier, Kathryn E., Product Safety, Contracts, and Liability (June 6, 2018). 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

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