Liability Design with Information Acquisition

Francisco Poggi and Bruno Strulovici

Papers from arXiv.org

Abstract: How to guarantee that firms perform due diligence before launching potentially dangerous products? We study the design of liability rules when (i) limited liability prevents firms from internalizing the full damage they may cause, (ii) penalties are paid only if damage occurs, regardless of the product's inherent riskiness, (iii) firms have private information about their products' riskiness before performing due diligence. We show that (i) any liability mechanism can be implemented by a tariff that depends only on the evidence acquired by the firm if a damage occurs, not on any initial report by the firm about its private information, (ii) firms that assign a higher prior to product riskiness always perform more due diligence but less than is socially optimal, and (iii) under a simple and intuitive condition, any type-specific launch thresholds can be implemented by a monotonic tariff.

Date: 2020-12
New Economics Papers: this item is included in nep-bec and nep-des
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2012.05066 Latest version (application/pdf)

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:arx:papers:2012.05066

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().