Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/23471
Authors: 
Hay, Bruce
Spier, Kathryn E.
Year of Publication: 
2004
Series/Report no.: 
CSIO working paper / Northwestern University, Center for the Study of Industrial Organization 0042
Abstract: 
This paper investigates whether manufacturers should be liable if consumers, through the use of a product, cause harm to others. If consumers have deep pockets then consumeronly liability is socially desirable. With consumer insolvency, however, consumer-only liability leads to inadequate consumer precautions, inadequate safety features, and excessive economic activity. With homogeneous insolvent consumers, the best rule is "residual-manufacturer liability" where the consumer bears primary responsibility and the manufacturer bears the shortfall in damages. When consumers' willingness-to-pay is correlated with social harm they cause then residual-manufacturer liability distorts the market quantity. When consumers differ in their wealth then residual manufacturer liability creates an inefficient cross-subsidization and an overprovision of safety features. In both cases, consumer-only liability may be preferred to residual-manufacturer liability. Applications, including gun manufacturer liability, are discussed.
Document Type: 
Working Paper

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