Preference revelation in strict liability product safety markets

Abstract

Strict liability rules in markets where product safety is an issue have two potential justifications that have been put forth in the literature. The most common justification is that strict liability provides incentives to producers to supply safe products. This notion is often based on an idea of persisting consumer misperceptions regarding the quality, or riskiness, of the products, as analyzed by Spence (1977) and Danzon (1984). The incidence of product-related accidents may, however, also depend on the consumers’ incentives to take precautions. A potential problem with strict liability regulation from this point of view is therefore that provision of safetyenhancing incentives to producers may provide disincentives to precautionary activities for consumers. This point was forcefully made by Oi (1973). He concluded that proper incentives to consumers often are more appropriate than producer liability to address the accident problem. Another justification for product liability regulation, which has been advocated by Epstein (1985), is that regulation provides better insurance coverage for risk-averse consumers as compared to an imperfect market insurance system.’ Strict liability does indeed provide comprehensive insurance coverage, but it is not obvious that the incentive problems regarding the consumers are less in a regulated environment as compared to a market setting. The opposite view is more widely held and was stated by Rea (1985) in a direct comment to Epstein (1985). In response to this criticism, strict liability rules are usually modified with the defense of contributory negligence to take account of consumer incentives. This joint incentive scheme has also dominated the theoretical literature on liability rules, but also relationships between strict liability, safety regulation, and social insurance have been explored.3 This literature has established that strict liability with the defense of