Risk, Informational Asymmetry and Product Liability: An Enquiry into Conflicting Objectives

Risky products cause two types of costs for society; the accident costs and the insurance costs. Liability rules allocate these costs between the parties involved. The expansion in the scope of product liability over the past thirty years has increased the cost of third-party liability insurance. However, the economic analysis of product liability rules has, generally, focused on only the accident costs. Some recent works have suggested that there is a strict trade-off involved when it comes to minimizing the accident costs and the insurance costs. In this paper, economic analysis has been extended by considering both types of costs. An efficiency characterization of product liability rules has been provided by assuming that consumers lack in the knowledge about the risk. Even when consumers misperceive the product risk, it is possible to achieve efficiency with respect to the insurance costs as well as the care levels. [CDE WP 164]