Product liability should reward firm transparency

Abstract

In this paper we analyze the role played by firms' transparency decisions on product liability standards. In particular we focus on information provided by firms on their processes and products. We find that even if transparency is not of direct importance to the courts, that is, is not informative as to findings of product defectiveness in a given case, the Law, in order to improve the incentives for the firm to provide the desired level of product quality, should optimally set product liability standards as a function of a firm's transparency level. Courts should be more lenient (in terms of evidence showing that the manufacturer is not liable) with those firms who have been more transparent in terms of product features and manufacturing information. Our result is reinforced when transparency reduces evidentiary uncertainty before the courts. This has implications for the interplay between market forces and product liability.