Manufacturer moral hazard and the Tort-contract issue in products liability

Should Consumers be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection

“…Each consumer derives a gross valuation of  from using the product and, in case there is an accident, she will suffer a harm of . 20 The probability that the product will cause an accident depends on both consumer's type (the propensity for accidents) and the amount of unobservable precaution taken by the manufacturer. More specifically, the probability of an accident for a consumer of type   is given by (   ) =   − , where  ∈ [0   ) stands for the amount of unobservable effort or precaution taken by the manufacturer for each purchasing consumer.…”

“…11 See also Epple and Raviv (1978); Polinsky and Rogerson (1983); Geistfeld (1995); Schwartz (1988Schwartz ( , 1992). In our model, even though consumers correctly perceive product safety, due to the problems of adverse selection, low-risk consumers have an incentive to accept suboptimal warranty and lower price, which, in turn, produces suboptimal deterrence incentive to the manfuacturers.…”

“…Product warranties will typically be less than full if there is a consumer moral hazard problem. SeeLutz and Padmanabhan (1995) for consumer moral hazard in an insurance model, and Lutz and Padmanabhan (1998) for a two-sided moral hazard model 20. The size of the harm  can be either fixed or in expectation, so that the actual harm may vary among consumers.…”

Should Consumers Be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection

“…Each consumer derives a gross valuation of  from using the product and, in case there is an accident, she will suffer a harm of . 20 The probability that the product will cause an accident depends on both consumer's type (the propensity for accidents) and the amount of unobservable precaution taken by the manufacturer. More specifically, the probability of an accident for a consumer of type   is given by (   ) =   − , where  ∈ [0   ) stands for the amount of unobservable effort or precaution taken by the manufacturer for each purchasing 19 Product warranties will typically be less than full if there is a consumer moral hazard problem.…”

“…See Lutz and Padmanabhan (1995) for consumer moral hazard in an insurance model, and Lutz and Padmanabhan (1998) for a two-sided moral hazard model. 20 The size of the harm  can be either fixed or in expectation, so that the actual harm may vary among consumers. Either assumption will produce the same substantive results.…”