American Economic Review Vol. 85 No. 5 1995
Product Safety: Liability, R&D, and Signaling
Abstract
We develop a monopoly model of product design and safety signaling incorporating a parametric liability specification. The firm first engages in R&D to affect the safety of its product. Since the outcome of R&D trials is unobservable to consumers, the firm then chooses its price, understanding that consumers may draw inferences from the price about the product's safety. Consumers acquire and use the product; injuries lead to losses which are allocated by the liability system. We vary the liability system's allocation of losses and trace out the implications for R&D investment and the price-safety relationship.
- Volume
- 85
- Issue
- 5
- Pages
- 1187-1206
- Sources
- bibtex:phds-export.bib