Product Liability Reform and Businesses in High-Risk Industries: Establishments, Employment, and Economic Activity

Abstract

Businesses and pro-business interest groups have often claimed that the litigation environment in the states influences their decisions about where and how to do business. However, very little empirical evidence exists to suggest that these claims are anything more than anecdotal. This study attempts to fill that void. I employ a triple-differences identification strategy in which businesses in high-liability industries in states that pass product liability reform serve as the treatment group and businesses in low-liability industries in those same states serve as the contemporaneous control group. Whereas, a traditional difference-in-difference analysis would have difficulty ruling out the possibility that product liability reforms are endogenous to other factors that influence business activity in a particular state, a triple-differences identification strategy that uses businesses in low-risk industries as a control group can mitigate many of the endogeneity concerns. My results suggest that three product liability reforms — reforms eliminating strict liability for product sellers, reforms adopting comparative negligence, and reforms enacting statutes of repose — have significant effects on business supply decisions in high-risk industries. These reforms are associated with increases in the number of small business establishments, employment in small business establishments, and real gross state product in high-risk industries. Thus, the results from my analysis shed some light on the inherent tradeoffs in the product liability system.