Abstract
This paper analyzes a two-period setup in which firms differ with respect to costs of care and may use care-taking to signal type to consumers, who are able to observe precaution taken only ex post. Applying the refinement of the intuitive criterion to the concept of the perfect Bayesian equilibrium, we establish a unique separating equilibrium for every share of harm borne by firms. For low levels of victim compensation, we show that (i) firms choose weakly higher care in a setting in which customers do not know the firms’ type than in a setting in which they do, and (ii) the deviation in precaution taken due to asymmetric information on firm type is welfare-improving.
Similar content being viewed by others
References
Bagwell K, Riordan MH (1991) High and declining prices signal product quality. Am Econ Rev 81: 224–239
Cho IK, Kreps DM (1987) Signaling games and stable equilibria. Q J Econ 102: 179–221
Cooter R, Ulen T (2008) Law and economics, 5th edn. Addison Wesley, Boston
Daughety A, Reinganum J (1995) Product safety: liability, R & D, and signaling. Am Econ Rev 85: 1187–1206
Daughety A, Reinganum J (2008) Products liability, signaling and disclosure. J Inst Theor Econ 164: 106–126
Endres A, Lüdecke A (1998) Incomplete strict liability: effects on product differentiation and information provision. Int Rev Law Econ 18: 511–528
Geistfeld MA (2009) Products liability. In: Faure M. (ed) The encyclopedia of law and economics, 2nd edn. Edward Elgar, Cheltenham
Lipsey RE, Lancaster K (1956) The general theory of second best. Rev Econ Stud 24: 11–32
Marette S, Bureau J-C, Gozlan E (2000) Product safety provision and consumers’ information. Aust Econ Pap 39: 426–441
Polinsky AM, Shavell S (2009) The uneasy case for product liability. Harvard John M. Olin Discussion Paper Series No. 647
Rasmusen E (2007) Games and information. Blackwell Publishing, Oxford
Shavell S (2004) Foundations of economic analysis of law. Harvard University Press, Cambridge
Shavell S (2007) Liability for accidents. In: Polinsky AM, Shavell S (eds) Handbook of law and economics, vol 1. Elsevier, Amsterdam, pp 139–182
Visscher L (2009) Tort damages. In: Faure M (ed) The encyclopedia of law and economics, 2nd edn. Edward Elgar, Cheltenham
Wickelgren A (2006) The inefficiency of contractually-based liability with rational consumers. J Law Econ Organ 22: 168–183
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Baumann, F., Friehe, T. Product liability and the virtues of asymmetric information. J Econ 100, 19–32 (2010). https://doi.org/10.1007/s00712-010-0123-6
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00712-010-0123-6