Products liability, consumer misperceptions, and the allocation of consumers to firms

This article shows that insulating market outcomes from consumers' misperceptions about product risk by compensating them fully for harm is not necessarily socially optimal. When firms offer products with different safety levels and consumers overestimate harm, incomplete compensation of product accident victims improves the allocation of consumers to firms. This effect can dominate the higher social costs arising from inefficient product safety levels.

Baumann, Florian and Tim Friehe (2021), Products liability, consumer misperceptions, and the allocation of consumers to firms, Economics Letters