Economics

Andrew F. Daughety, Jennifer F. Reinganum

Products Liability, Signaling and Disclosure

Volume 164 () / Issue 1, pp. 106-126 (21)

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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.
Authors/Editors

Andrew F. Daughety No current data available.

Jennifer F. Reinganum No current data available.