31.03.2023 Forthcoming paper in Journal of Law, Economics And Organization

We are happy to announce that our paper titled "Product Liability and Firm Owners's Delegation to Overconfident Manangers" has been accepted for publication in the Journal of Law, Economics And Organization.

This paper studies the optimal way to allocate losses from product-related accidents between firms and their consumers. The novelty of the paper lies in the combination of two well-known facts: firms are run in a hiearchical structure where owners/board of directors hire CEOs based on their overconfidence level to oversee daily operations and consumers either under- or overestimate risks from using products.   

We find that firm owners always hire managers who are overconfident about their product safety's effectiveness in reducing product-related accident risk. However, the extent of overconfidence depends on consumers' risk perceptions and the allocation of liability. 

As a result, the socially optimal liability allocation hinges on whether consumers underestimate or overestimate product risk. When consumers overestimate product risks, firms should be held liable for all losses incurred by consumers. However, when consumers underestimate risk, firms should only be held liable for a part of consumer losses.

We also show that, in some circumstances, negligence produces socially more desirable outcomes than strict liability.

The link to the published version of the paper will soon be found HERE.