Manufacturer Liability for Harms Caused by Consumers to Others
NBER Working Paper No. 10972
Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets then manufacturer liability is not economically efficient. It is more efficient for the consumers themselves to bear responsibility for the harms that they cause. If homogeneous consumers have limited assets, then the most efficient rule is "residual-manufacturer liability" where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be more efficient.
Published: Hay, Bruce and Katherine Spier. “Manufacturer Liability for Harm Caused by Consumers to Others.” The American Economic Review 94, 5 (2005): 1700-1711.