Liability, morality, and image concerns in product accidents with third parties
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Liability, morality, and image concerns in product accidents with third parties Christoph Rössler1 · Tim Friehe1,2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper explores how consumers’ moral and image concerns influence the equilibrium in a product-accident model in which third parties incur harm. We differentiate results according to whether the product is supplied by a monopolistic firm or competitive ones. Assuming incomplete compensation of third parties, we find that both moral and image concerns of consumers increase product safety in the context of a competitive market, while the monopolist’s product safety level varies exclusively with consumers’ morality. Comparing market outcomes, we find that the monopolist’s product safety levels may induce greater welfare than a competitive industry. Keywords Product liability · Moral concerns · Image JEL Classification D8 · D42 · K13 · L12
1 Introduction 1.1 Motivation and main results The relationship between morality and market outcomes has been important to policy makers and academics since Adam Smith’s groundbreaking work and continues to incite curiosity until this day (e.g., Baumann and Friehe 2017; Deffains and Demougin 2011; Falk and Szech 2013). If economic agents (partly) internalize the potential harm from immoral acts (e.g., selling hazardous products), fewer immoral * Christoph Rössler [email protected]‑marburg.de Tim Friehe tim.friehe@uni‑marburg.de 1
Public Economics Group, University of Marburg, Am Plan 1, 35032 Marburg, Germany
2
CESifo, Munich, Germany
13
Vol.:(0123456789)
European Journal of Law and Economics
acts are to be expected, meaning that morality may amend the absence of other institutions (e.g., Shavell 2002; Kaplow and Shavell 2007). However, Ognedal (2016), for example, highlights that it may be naive to think that a higher fraction of moral agents always improves market outcomes. Recently, other studies have clarified that people may not only care about acting morally but also about being perceived by other individuals as having high moral standards (e.g., Andreoni and Bernheim 2009; Bénabou and Tirole 2006; Bénabou et al. 2018; McAdams and Rasmusen 2007). Our paper examines firms catering to consumers with both moral and image concerns, seeking to understand how these concerns interact with an imperfect liability rule in producing a market outcome. To be clear, we define “moral concerns” as individuals’ tendency to adhere to the moral rule of not harming others and, if so, at least compensating the victim for harm done. Kaplow and Shavell (2001) argue that this is the most prevalent moral rule in the context of issues dealt with by tort law. We assume that individuals feel intrinsically obliged to follow that moral rule, meaning that they feel guilty when inflicting uncompensated harm unto others (as in Deffains and Fluet 2013).1 Experimental evidence shows that individuals exercise care even in the absence of (or in the presence of very limited) liability (e.g.
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