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Product Liability: Beyond Class Action

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  • Dan Sasaki

Abstract

Can punitive product liability enhance economic efficiency? A very simple economic theory, assuming that the probability and the degree of product dissatisfaction are functions only of the producer's not of the consumer's effort, is modelled and analysed in this paper. The qualitative conclusion hinges critically upon whether the legal liability is reflected on price determination. If the price of the product is insensitive to product liability legislation, then punitive liability beyond the class action (i.e., compensatory payments more than proportional representation of potentially dissatisfied consumers) can induce socially desirable levels of effort exerted by the producer firm. This affirmative effect disappears if the price fully reflects all the expected legal liabilities, whereby punitive liability tends to reduce economic efficiency by encouraging costly lawsuit.

Suggested Citation

  • Dan Sasaki, 2000. "Product Liability: Beyond Class Action," Australian Economic Papers, Wiley Blackwell, vol. 39(4), pages 442-451, December.
    • Handle: RePEc:bla:ausecp:v:39:y:2000:i:4:p:442-451
    DOI: 10.1111/1467-8454.00103
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