Should Consumers be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection

Albert H. Choi and Kathryn E. Spier

The Journal of Law, Economics, and Organization, 2014, vol. 30, issue 4, 734-766

Abstract: A potentially dangerous product is supplied by a competitive market. The likelihood of a product-related accident depends on the unobservable precautions taken by the manufacturer and on the risk type of the consumer. Contracts include the price to be paid by the consumer ex ante and stipulated damages to be paid by the firm ex post in the event of an accident. Although the stipulated damage payments are a potential solution to the moral hazard problem, firms have a private incentive to reduce the stipulated damages (and simultaneously lower the up front price) in order to attract the safer consumers who are less costly to serve. The competitive equilibrium—if an equilibrium exists at all—features suboptimally low stipulated damages and correspondingly suboptimal levels of product safety. Imposing some degree of tort liability on firms for uncovered accident losses—and prohibiting private parties from waiving that liability—can improve social welfare. (JEL K13, K12, L15, D82, D86).

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://hdl.handle.net/10.1093/jleo/ewt019 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
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:jleorg:v:30:y:2014:i:4:p:734-766.

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

Access Statistics for this article

The Journal of Law, Economics, and Organization is currently edited by Andrea Prat

More articles in The Journal of Law, Economics, and Organization from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().