Product recall with symmetric uncertainty and multiunit purchases

This paper considers product recall under a perfect regime of strict liability. We show that safety is under supplied given output due to an under internalization of infra-marginal units. If we add a mandatory refund with a possible penalty fee in the event that the product turns out to be unsafe, t...

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Bibliographic Details
Published in:Journal of regulatory economics 2021-08, Vol.60 (1), p.1-21
Main Author: Marino, Anthony M.
Format: Article
Language:English
Subjects:
Economics
Economics and Finance
Endogenous
Fines
Fines and penalties
Industrial Organization
Internalization
Liability
Microeconomics
Original Article
Product recalls
Products liability
Public Finance
Taxation
Uncertainty
Unsafe
Welfare
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Summary:This paper considers product recall under a perfect regime of strict liability. We show that safety is under supplied given output due to an under internalization of infra-marginal units. If we add a mandatory refund with a possible penalty fee in the event that the product turns out to be unsafe, then while the price increases, there is no change in the allocation, utility, profit or total welfare. The recall procedure is then neutral. We then extend the model to examine optimal fines and minimum output taxes, endogenous proclivity to return a product, endogenous decision to sue in the event of damage and the effects of having the consumer under estimate expected damages.
ISSN:0922-680X
1573-0468
DOI:10.1007/s11149-021-09434-3