Product liability under ambiguity

Andrea Castellano (), Fernando Tohmé and Omar Chisari
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Andrea Castellano: Universidad Nacional del Sur-CONICET

European Journal of Law and Economics, 2020, vol. 49, issue 3, No 6, 473-487

Abstract: Abstract The introduction of new varieties of goods increases welfare under certainty and perfect competition. However, when the quality of new goods is uncertain, the need for a regulatory regime on liabilities and hazards arises. We examine the optimality of the regulatory mechanisms of quality under ambiguity (non-uniqueness of the probability distribution). We develop a model showing that product liability does not lead to optimality under ambiguity and so it constitutes an inadequate instrument for controlling the potential damages caused by innovative products. The level of precaution will be larger, equal or less than the optimal level and will decrease with the degree of optimism and will increase with the degree of pessimism. Consequently the price will not reflect the actual product risk and consumers will buy either an insufficient or an excessive amount, according to the case. We present some considerations on the adequate institutional design, capturing the insights obtained in the comparison between regulatory regimes.

Keywords: Regulation; Quality; Ambiguity; Product liability (search for similar items in EconPapers)
JEL-codes: D18 K13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10657-020-09655-5

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