Abstract:
The cost of reading and understanding voluntary warranties provides a new justification for mandatory products liability. If consumers could cheaply read and understand warranties, product liability law might be unnecessary, because, if there were no product liability, manufacturers would signal that their goods were safe by voluntarily providing warranties which mimicked (or improved upon) product liability law. Unfortunately, if reading costs are positive, warranties will not be consistently offered in equilibrium. If all manufacturers offered warranties, then it would be irrational for consumers to incur the cost of reading them. But if consumers don’t read warranties, then manufacturers have no incentive to offer them. Thus, in the absence of mandatory product liability, the best that one could expect is a mixed equilibrium in which some manufacturers offered warranties and some consumers read them. Such an equilibrium gives manufacturers suboptimal incentives to take safety precautions. As a result, mandatory product liability law may be superior.
Klerman, Daniel M., Product Liability and Rational Consumer Ignorance (January 17, 2012).
First posted 2012-01-20 19:47:43
Leave a Reply