Products liability when consumers are salient thinkers

Abstract

This paper analyzes how product liability influences choices by a brand manufacturer who faces competition from a competitive fringe when consumers are salient thinkers. The market outcome critically depends on the losses that are shifted to the firm, that is, the traditional irrelevance of liability assignments no longer holds. Moreover, we show that the brand manufacturer implements suboptimal product safety and explain that the firm, if subjected to the negligence rule, may choose to be negligent.