Uncertain product risk, information acquisition, and product liability

- We study incentives to acquire information about the risk of newly developed products.
- Firm's incentives are influenced by product liability and regulatory product approval.
- Firm's incentives may be insufficient or excessive.
- Our analysis identifies efficiency-inducing liability rules.

We describe how product liability interacts with regulatory product approval in influencing a firm's incentives to acquire information about product risk, using a very parsimonious model. The firm may have insufficient information acquisition incentives if it is not fully liable for the harm caused by its product. The firm may also have excessive information acquisition incentives under both full and limited liability. Our analysis identifies efficiency-inducing liability rules.