Product Recall with Symmetric Uncertainty and Multiunit Purchases

32 Pages Posted: 18 Feb 2021

See all articles by Anthony M. Marino

Anthony M. Marino

University of Southern California - Marshall School of Business

Date Written: February 10, 2021

Abstract

This paper considers product recall under a perfect regime of strict liability. We show that safety is under supplied given output due to an under internalization of infra-marginal units. If we add a mandatory refund with a possible penalty fee in the event that the product turns out to be unsafe, then while the price increases, there is no change in the allocation, utility, profit or total welfare. The recall procedure is then neutral. We then extend the model to examine costly recall for the firm, optimal fines and minimum output taxes, endogenous proclivity to return a product, endogenous decision to sue in the event of damage and the effects of having the consumer under estimate expected damages.

Keywords: Product Recall, Product Refunds, Fines

JEL Classification: L51

Suggested Citation

Marino, Anthony M., Product Recall with Symmetric Uncertainty and Multiunit Purchases (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=3783474 or http://dx.doi.org/10.2139/ssrn.3783474

Anthony M. Marino (Contact Author)

University of Southern California - Marshall School of Business ( email )

Dept. of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6525 (Phone)
213-740-6650 (Fax)

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