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American Economic Review: Vol. 95 No. 4 (September 2005)

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Secrecy and Safety

Article Citation

Daughety, Andrew F., and Jennifer F. Reinganum. 2005. "Secrecy and Safety." American Economic Review, 95(4): 1074-1091.

DOI: 10.1257/0002828054825673

Abstract

We provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness. A rational risk-neutral consumer's response in a market, wherein a firm engages in confidential settlements, may be to reduce demand. A firm committed to openness incurs higher liability and R&D costs, though product demand is not diminished. We identify conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm prefers to eschew confidentiality.

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Authors

Daughety, Andrew F.
Reinganum, Jennifer F.


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