Secrecy and Safety

Andrew Daughety and Jennifer Reinganum ()

American Economic Review, 2005, vol. 95, issue 4, 1074-1091

Abstract: We provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness. A rational risk-neutral consumer's response in a market, wherein a firm engages in confidential settlements, may be to reduce demand. A firm committed to openness incurs higher liability and R&D costs, though product demand is not diminished. We identify conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm prefers to eschew confidentiality.

Date: 2005
Note: DOI: 10.1257/0002828054825673
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Working Paper: Secrecy and Safety (2004)
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