Product liability, multidimensional R&D and innovation

Research output: Journal PublicationsJournal Article (refereed)peer-review

Abstract

This paper studies the effect of product liability cost on firms’ incentives to conduct R&D when innovation inherently consists a safety dimension and a novelty dimension. We consider a situation where a monopoly firm chooses both product novelty and product safety in an R&D stage followed by a production stage. While firms will invest more in product safety as product liability cost increases, their incentive for product novelty may increase or decrease, depending on the relative strengths of a demand-shifting effect and a cross-R&D effect identified in the model. Consequently, a higher product liability cost may decrease consumer welfare and total welfare. We extend the results to an oligopoly model with differentiated products and study the effects of competition. We find that equilibrium product novelty and safety levels decrease with the number of firms but exhibit non-monotonic relationships with the degree of product substitutability.
Original languageEnglish
Pages (from-to)25-45
Number of pages21
JournalJournal of Economics
Volume136
Issue number1
Early online date9 Oct 2021
DOIs
Publication statusPublished - Jun 2022

Bibliographical note

For helpful comments and suggestions, we thank the editor, two referees, and the participants at Asia-Pacific Industrial Organisation Conference (University of Melbourne) and Hong Kong Economic Association Biennial Conference (Xiamen).

Publisher Copyright:
© 2021, The Author(s), under exclusive licence to Springer-Verlag GmbH Austria, part of Springer Nature.

Keywords

  • Innovation incentive
  • Product liability
  • Product novelty
  • Product safety

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