Abstract
This paper examines regulation in markets where firms choose price-liability combinations. Our work implies that a recently suggested regulatory rule, restricting the maximum liability that can be assumed, does not increase consumer welfare. We also study a rule inspired by the German audit market, in which maximum liability is restricted but only as a multiple of the price. This reduction in the dimensionality of firm's strategy space is shown to reduce consumer welfare, if the liability–price multiple is smaller than the multiple observed under no regulation. However, even larger liability–price multiples could leave consumers worse off.
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