Product Recall with Symmetric Uncertainty and Multiunit Purchases
32 Pages Posted: 18 Feb 2021
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: Suggested Citation