Product guarantees and liability rules : an economic analysis

Sammanfattning: This study is an economic analysis of product guarantees and liability rules as devices for protecting consumers against risks of product failure, ranging from simple product malfunctioning to product-related injuries. It attempts to shed light on consumer policy issues that are raised by market inefficiencies due to unequal access to product information between consumers and producers. Against this general background, use of product guarantees and liability rules is analysed in the context of simple models. It develops a framework for discussing the relative desirability of several liability rules, when only producers can exercise accident prevention efforts. Attention is given to the possibility that consumers may overestimate product reliability and to monopolistic behavior in the product market of concern. Two main conclusions emerge from the analyses: First, it is in general inoptimal to institute product guarantee schemes that eliminate consumer exposure to risks. In markets where consumers are uncertain about quality variations and producers are unwiling to disclose quality, compulsory minimun guarantees may be superior to minimun quality standard requirements. Second, when consumers are prone to overestimate product reliability and the market is competitive, the strict liability rule is best. But if the market is monopolistic, either consumer liability or the rule of negligence is preferable to strict liability. The result accords with the general principle that liability be placed on the party with the greater comparative advantage in accident prevention.