Optimal Liability when Consumers Mispredict Product Usage

Andrzej Baniak and Peter Grajzl

American Law and Economics Review, 2017, vol. 19, issue 1, 202-243

Abstract: We contrast alternative liability rules for social control of product risks when heterogeneous consumers considering purchasing a durable good due to cognitive errors and biases mispredict future product benefits and, thus, the extent of future product usage. Since the expected consumer harm directly depends on the level of product usage, the consequences of consumers' mispredictions vary with the prevailing liability regime. We first characterize the consumers' purchasing decision and the equilibrium levels of safety and activity from the product's usage under no liability, strict liability, and negligence rule. We then compare the three legal regimes from the social welfare standpoint. We show that social welfare is highest under no liability when consumers substantially underestimate future product benefits; under strict liability when consumers substantially overestimate future product benefits; and under negligence whenever consumers' misprediction is moderate or nonexistent.

JEL-codes: D03 D61 K13 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://hdl.handle.net/10.1093/aler/ahw017 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Optimal Liability when Consumers Mispredict Product Usage (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:amlawe:v:19:y:2017:i:1:p:202-243.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

American Law and Economics Review is currently edited by J.J. Prescott and Albert Choi

More articles in American Law and Economics Review from American Law and Economics Association Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().