The Case Against Products Liability

Law and Economics scholars Steven Shavell and A. Mitchell Polinsky have posted “The Uneasy Case for Products Liability” on SSRN.  Here is the abstract:

We explain in this Article that the benefits of product liability maywell be outweighed by its costs in a wide range of circumstances. Onebenefit is that the threat of liability may induce firms to improveproduct safety. However, this benefit is limited: even in the absenceof product liability, firms would often be motivated by market forcesto enhance product safety because their sales are likely to fall iftheir products harm consumers; moreover, their products must frequentlyconform to safety regulations. Consequently, product liability mightnot be expected to exert a significant additional influence on productsafety — and the available empirical evidence suggests that suchliability does not in fact have a measurable effect on the frequency ofproduct accidents. A second benefit of product liability is that itcauses product prices to increase to reflect the riskiness of productsand thereby may improve consumer purchase decisions. But this benefitalso involves a detriment, because product prices may rise excessivelyand undesirably chill purchases. A third benefit of product liabilityis that it compensates victims of product-related accidents for theirlosses. Yet this benefit is only partial, for accident victims arealready often compensated by their insurers for some or all of theirlosses. Potentially offsetting the benefits of product liability areits costs, which are great. To transfer a dollar to a victim of aproduct accident requires more than a dollar on average in legalexpenses. Given the limited benefits and the high costs of productliability, we conclude that it may be socially undesirable — especiallyfor widely sold products, with respect to which market forces andregulation are relatively strong. This judgment is in tension both withthe broad social endorsement of product liability and with proposalsfor its reform, which generally do not question its existence. Our morecritical assessment of product liability stems from the fact that weengage in an analysis of its benefits and costs, whereas neither theproponents of product liability nor its reformers undertake to do so.

A cost benefit analysis that takes account of the costs of litigation as a social cost is useful.  I guess we need to compare the social costs of litigation with the social costs of administrative regulation and “market” regulation in order to determine which is the most efficient mode of regulation.  Looks like an interesting piece.

ADL