A note on the optimality of (even more) incomplete strict liability

This paper starts from the premise that liability is incomplete and establishes that firms may nevertheless invest excessively in care. This may justify a (further) reduction in the level of liability from a social standpoint, thereby arguing against seeking to approach full compensation as close as possible. In our framework, firms are liable under product liability, but also invest in care to prevent consumers' switching to competitors. Affecting the partition of consumers by means of care-taking is not desirable from a social standpoint. Consequently, it may be optimal to reduce liability below a given level of incomplete compensation in order to adjust firms' care incentives.

Research highlights► Liability is often incomplete. ► Nevertheless, firms may invest excessively in care due to market forces. ► Thus, it may be socially optimal to further reduce the level of liability.