PRODUCTS LIABILITY WHEN CONSUMERS VARY IN THEIR SUSCEPTIBILITY TO HARM AND MAY MISPERCEIVE RISK

I. INTRODUCTION A large literature has developed to explore the unique aspects of accidents involving consumer products when the victim is also the purchaser. (1) The main difference between these product-related accidents and accidents in which the injurer and victim are "strangers" is that the amount consumers are willing to pay for a risky product will reflect the amount of harm they expect to incur in the event of an accident. This expectation will depend on two factors: the applicable liability rule for assigning accident damages and the accuracy of consumers' perception of the risk of an accident. Two results are well known in this context. First, when consumers correctly perceive the risk of a product-related accident, the outcome will be efficient regardless of the liability rule. This is essentially a consequence of the Coase Theorem (Coase 1960), given that any assignment of liability imposed by the law will be perfectly reflected by appropriate shifts in the demand and supply curves for the product. As a result, firms will choose optimal product safety, and consumers will purchase the efficient amount of the product. Second, when consumers misperceive risk, only strict liability is efficient because firms (which are assumed to perceive risks accurately) will set a price that correctly conveys product risk to consumers, so they will purchase the correct amount, and firms, because they bear the full damages from any accidents, will invest in efficient safety. This article extends this literature by considering situations where consumers have private information, prior to purchase, about their differing susceptibilities to product-related harm. This is descriptive of many types of potentially harmful products, such as when consumers may have allergies to certain foods, or when they may suffer side effects from certain drugs. In addition, proper use of certain products requires a minimum level of physical strength and/or know-how, as in the case of power tools (like chain saws) or heavy machinery. In all of these cases, it is desirable for consumers to self-select in their purchases decision, with those who lack the necessary capability or who are especially prone to harm refraining from purchase. A crucial factor in achieving this outcome, however, is that consumers must expect to bear their own harm, given that producers cannot identify consumer types prior to purchase. Thus, even with accurate consumer perceptions, the various liability rules are no longer equally efficient (in particular, strict liability no longer leads to efficient purchase decisions). When consumers also misperceive risk, the problem becomes even more complicated because, while efficient self-selection requires consumers to bear their own harm, accurate signaling of risk requires that firms bear full liability (assuming that firms have better information about product risk than consumers). A trade-off therefore emerges between imposing liability on firms versus consumers. The purpose of this article is to characterize the choice among the various liability rules (no liability, strict liability, and negligence) in the presence of this trade-off. The general results can be summarized as follows. When all consumers suffer the same harm and perceive risk accurately, all of the liability rules are efficient, but when consumers misperceive risk, only strict liability remains efficient. When consumers suffer varying harm and perceive risk accurately, negligence and no liability are efficient, but strict liability is not. However, when consumers misperceive risk, none of the liability rules is efficient. In this case, the preferred rule depends on the degree of misperceptions: specifically, when consumers perceive risk fairly accurately, negligence is optimal, but when they perceive risk very inaccurately, strict liability is optimal. The remainder of the article is organized as follows. Section II lays out the model and briefly summarizes the benchmark case where all consumers suffer the same harm. …