Secrecy and Safety
- (pp. 1074-1091)
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.Citation
Daughety, Andrew, F., and Jennifer F. Reinganum. 2005. "Secrecy and Safety." American Economic Review, 95 (4): 1074-1091. DOI: 10.1257/0002828054825673Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- K13 Tort Law and Product Liability; Forensic Economics
- L15 Information and Product Quality; Standardization and Compatibility