In a complex economy, production is vertical and crosses jurisdictional lines. Goods are often produced by an upstream national or global firm and improved or distributed by local firms downstream. In this context, heightened products liability may have unintended consequences on product sales and consumer safety. Conventional wisdom holds that an increase in tort liability on the upstream firm will cause that firm to (weakly) increase investment in safety or disclosure. However, this may fail in the real-world, where upstream firms operate in many jurisdictions, so that the actions of a single jurisdiction may not be significant enough to influence upstream firm behavior. Even worse, if liability is shared between upstream and downstream firms, higher upstream liability may mechanically decrease liability of the downstream distributor and encourage more reckless behavior by the downstream firm. In this manner, higher upstream liability may perversely increase the sales of a risky good. We demonstrate this phenomenon in the context of the pharmaceutical market. We show that higher products liability on upstream pharmaceutical manufacturers reduces the liability faced by downstream doctors, who respond by prescribing more drugs than before.So when liability is increased on the upstream firm we can see greater risks being taken by the downstream firm and an increase in the sales of a risky good, which it seems fair to assume is not the intended outcome of an increase in product liability.
Monday, 24 March 2014
Another example of the law of unintended consequences
One of the more obvious problems with economic regulation is the law of unintended consequences. You can end up with results that are the opposite of those intended. What happens when product liability is strengthen in a world where production is vertical and crosses jurisdictional lines? If goods are produced by an upstream national or international firm and improved or distributed by local firms downstream does a strengthening of product liability have unintended consequences on product sales and consumer safety? This question is asked in a new NBER working paper, Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market by Eric Helland, Darius Lakdawalla, Anup Malani and Seth A. Seabury. The paper's abstract reads,