Baniak and Grajzl, ‘Optimal Liability when Consumers Mispredict Product Usage’

Abstract:
We contrast alternative liability rules for social control of product risks when heterogeneous consumers considering purchasing a durable good due to cognitive errors and biases mispredict future product benefits and, thus, the extent of future product usage. Since the expected consumer harm directly depends on the level of product usage, the consequences of consumers’ mispredictions vary with the prevailing liability regime. We first characterize the consumers’ purchasing decision and the equilibrium levels of safety and activity from the product’s usage under no liability, strict liability, and negligence rule. We then compare the three legal regimes from the social welfare standpoint. We show that social welfare is highest under no liability when consumers substantially underestimate future product benefits; under strict liability when consumers substantially overestimate future product benefits; and under negligence whenever consumers’ misprediction is moderate or nonexistent.

Andrzej Baniak and Peter Grajzl, Optimal Liability when Consumers Mispredict Product Usage, American Law and Economics Review (2016), doi: 10.1093/aler/ahw017. First published online: December 26, 2016.

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