Secrecy and Safety

Jennifer Reinganum () and Andrew F Daughety ()

No 53, Econometric Society 2004 North American Summer Meetings from Econometric Society

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 consumerÂ’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: product saftey; confidential settlement (search for similar items in EconPapers)
JEL-codes: K0 L1 (search for similar items in EconPapers)
Date: 2004-08-11

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Working Paper: Secrecy and Safety
Working Paper: Secrecy and Safety (2003)
Journal Article: Secrecy and Safety (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:ecm:nasm04:53

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