Secrecy and Safety

Andrew Daughety and Jennifer Reinganum ()

No 317, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We employ a simple two-period model to show that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average product safety than that which would be produced if a firm were committed to openness. Moreover, confidentiality can even lead to declining average product safety over time. We also show that a rational risk-neutral consumer's response to a market environment, wherein a firm engages in confidential settlement agreements, may be to reduce demand. We discuss how firm profitability is influenced by the decision to have open or confidential settlements; all else equal, a firm following a policy of openness will pay higher equilibrium wages and incur higher training costs, though product demand will not be diminished (as it may be for a firm employing confidentiality). Further, we characterize the choice of regime, providing conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm will choose to pay for auditing and eschew confidentiality.

Keywords: confidential settlement; product safety (search for similar items in EconPapers)
JEL-codes: K13 L15 (search for similar items in EconPapers)
Date: 2003-08, Revised 2003-09
New Economics Papers: this item is included in nep-law and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.accessecon.com/pubs/VUECON/vu03-w17.pdf Revised version, 2003 (application/pdf)

Related works:
Journal Article: Secrecy and Safety (2005)
Working Paper: Secrecy and Safety (2004)
Working Paper: Secrecy and Safety
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0317

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