Imperfect Information, Costly Litigation, and Product Quality
Volume: Volume 12, No. 1
Issue: Spring 1981
Pages: 171-184
Authors: Marilyn J. Simon
Title: Imperfect Information, Costly Litigation, and Product Quality
Abstract: This article examines the effect of costly litigation and imperfect information on the quality of output. An equilibrium is described in which consumers are uncertain about the result of a lawsuit. The findings show that for a wide range of due care standards there will be both negligent and nonnegligent firms in the market. Furthermore, as the population becomes more risk averse the proportion of output produced by negligent firms increases. If absolute risk aversion decreases as income increases, and there is market segmentation, reliance on litigation to control product quality will have undesirable distributional effects.
JEL Classification
Economics of Health including medical subsidy programs (9130)
Consumer Protection (9213)