Products Liability, Signaling and Disclosure

Andrew Daughety and Jennifer Reinganum ()

Journal of Institutional and Theoretical Economics (JITE), 2008, vol. 164, issue 1, 106-126

Abstract: We examine the behavior of a firm that produces a product with a privately-observed safety attribute. Costly disclosure and price-signaling of safety are alternative firm strategies. The liability system and production cost determine the firm's full marginal cost. When the firm's full marginal cost is increasing (decreasing) in safety, a firm with a safer product will distort its price upward (downward) and will sometimes inefficiently choose to signal rather than disclose (to disclose rather than signal). We also allow for a small fraction of naively optimistic (pessimistic) consumers; this leads to less price distortion and decreased (increased) incentives to disclose.

JEL-codes: D82 K13 L15 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (29)

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