Products liability with temptation bias

Abstract

This paper extends the literature on products liability by considering the implications of temptation in a context where consumers have different susceptibilities to risk. In response to consumer heterogeneity, producers can offer multiple product varieties that vary according to their riskiness and price. However, when consumers exhibit price-based temptation, the price differential can tempt some consumers to purchase a less safe product variety even when that purchase decision might not be the rational choice given their specific risks. In resisting this temptation, they incur self-control costs. The role of temptation has been studied in other contexts, but its implications for the design of product liability rules have not previously been explored. We show that there is a trade-off between the desirability of sorting due to consumer heterogeneity and the allocative impacts from temptation. No liability leads to excessive risk taking by consumers (due to temptation), while full liability leads to excessive caution by consumers (because of the inability to sort). Thus, full liability is welfare-maximizing if temptation is sufficiently strong, but when temptation is low, increasing liability will have the opposite effect, leading to more purchases of the unsafe product and hence a decrease in overall safety and social welfare.