Markets, Torts, and Social Inefficiency

Andrew F Daughety () and Jennifer Reinganum ()

RAND Journal of Economics, 2006, vol. 37, issue 2, pages 300-323

Abstract: We provide a model wherein oligopolists produce differentiated products that also have a safety attribute. Consumption of these products may lead to harm (to consumers and/or third parties), lawsuits, and compensation, either via settlement or trial. Firm-level costs reflect both safety investment and production activities, as well as liability-related costs. Compensation is incomplete, both because of inefficiencies in the bargaining process and (possibly) because of statutorily established limits on awards. We compare the market equilibrium safety effort and output levels to what a planner who is able to set safety standards, but takes the market equilibrium output as given, would choose. Ordering information: This article can be ordered from http://gemini.econ.umd.edu/cgi-bin/rje_online.cgi?action=buy&year=2006&issue=sum&page=300&tid=30492&sc=1869P1N9.

Date: 2006

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Working Paper: Markets, Torts and Social Inefficiency (2003)
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