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How Liability Distorts Incentives of Manufacturers to Recall Products

Omri Ben-Shahar, University of Michigan Law School

Abstract

The nature and likelihood of harms associated with products may be revealed over time. As more information is gathered, a manufacturer must decide whether to continue selling the product as is, or to recall it. The paper shows that existing products liability law gives the manufacturers bad incentive to recall products. It shows, counter-intuitively, that as the post-recall liability becomes more severe, manufacturers would be more likely to leave products in the market longer and more often than is socially desirable. It also demonstrates that the law hurts the incentives of manufacturers to acquire better information about the riskiness of products already in use. The paper discusses several ways in which liability can be designed in a way that would produce more efficient recall and safety-research decisions, to the benefit of society in general and of consumers in particular.

Subject Area

Law and Economics, Torts

Recommended Citation

Omri Ben-Shahar, "How Liability Distorts Incentives of Manufacturers to Recall Products" (January 2005). University of Michigan Legal Working Paper Series. University of Michigan John M. Olin Center for Law & Economics Working Paper Series. Working Paper 37.
http://law.bepress.com/umichlwps/olin/art37

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