Product Liability and Strategic Delegation: Endogenous Manager Incentives Promote Strict Liability

Tim Friehe, Cat Lam Pham () and Thomas J. Miceli ()
Additional contact information
Cat Lam Pham: University of Marburg
Thomas J. Miceli: University of Connecticut

Review of Industrial Organization, 2022, vol. 61, issue 2, No 2, 149-169

Abstract: Abstract We derive the socially optimal allocation of liability for product-related accidents when firms delegate their output and safety choices to managers under a contract that depends on profits and revenues. With exogenous product risk, the optimal contract emphasizes revenue over profits as a way of inducing managers to increase output independently of the liability allocation. When product safety is endogenous, however, this strategy distorts managers’ product safety choice because the managers underweight the cost of safety relative to expected harm whenever consumers bear some share of liability. It is then socially optimal to hold firms fully liable for victim losses.

Keywords: Delegation; Managers; Product liability; Product safety (search for similar items in EconPapers)
JEL-codes: K13 L13 L14 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11151-022-09870-1 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:revind:v:61:y:2022:i:2:d:10.1007_s11151-022-09870-1

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11151/PS2

DOI: 10.1007/s11151-022-09870-1

Access Statistics for this article

Review of Industrial Organization is currently edited by L.J. White

More articles in Review of Industrial Organization from Springer, The Industrial Organization Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().