The effects of product liability costs on R&D with asymmetric information

This paper examines the effects of product liability costs on R&D with asymmetric information. When the product is defective, both the consumer and producer share the resulting losses. This paper explores the impacts of liability costs on the firm's R&D decisions in three information structures: full information; hidden information; and hidden information and hidden action. It is found that the effects differ across information structures. This paper also compares the equilibrium amounts of R&D and social welfare levels across three cases. Equilibrium R&D is smaller than the socially optimal level for each information structure.