Liability or labeling? Regulating product risks with costly consumer attention

Abstract

This paper examines the liability and labeling approaches to regulating product safety. Stronger product liability increases producer care, which then has a negative “lulling effect” on consumer attention to warning labels. By contrast, more visible warning labels increase such consumer care, which then has a positive “vigilance effect” on producer care. Information campaigns educating consumers about product risks generate a similar vigilance effect. This happens because consumers view producer care and consumer care levels as strategic substitutes, while the firm views them as strategic complements. We argue that when a public policy is chosen, the endogeneity of consumer attention to warnings is not to be overlooked.