Liability or labeling? Regulating product risks with costly consumer attention

•We study the effects of risk disclosure and product liability on product safety.•Consumers take care by paying attention to warning labels.•Producer care has a lulling effect on consumer care.•Consumer care has a vigilance effect on producer care.•Visible warnings tend to reduce harm, but stronger...

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Bibliographic Details
Published in:Journal of economic behavior & organization 2018-10, Vol.154, p.238-252
Main Authors: Arbatskaya, Maria, Aslam, Maria Vyshnya
Format: Article
Language:English
Subjects:
Economics of attention
Mandatory disclosure
Product labeling regulation
Product liability
Warning labels
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Summary:•We study the effects of risk disclosure and product liability on product safety.•Consumers take care by paying attention to warning labels.•Producer care has a lulling effect on consumer care.•Consumer care has a vigilance effect on producer care.•Visible warnings tend to reduce harm, but stronger liability can improve welfare. This paper examines the liability and labeling approaches to regulating product safety. Stronger product liability increases producer care, which then has a negative “lulling effect” on consumer attention to warning labels. By contrast, more visible warning labels increase such consumer care, which then has a positive “vigilance effect” on producer care.Information campaigns educating consumers about product risks generate a similar vigilance effect. This happens because consumers view producer care and consumer care levels as strategic substitutes, while the firm views them as strategic complements. We argue that when a public policy is chosen, the endogeneity of consumer attention to warnings is not to be overlooked.
ISSN:0167-2681
1879-1751
DOI:10.1016/j.jebo.2018.08.016