Tort Law and Innovation Incentive

This paper studies the effect of stricter tort law on innovation incentive. Traditional studies argue that stricter tort law hinders product innovation because firms will not risk releasing innovative products for fear of unforeseen liability. In this paper, we show that stricter tort law may promote innovation under an asymmetric duopoly when two firms differ in the cost of safety production. In our model, when liability costs become sufficiently large which causes the less innovative firm to exit the market, the market expansion effect provides more incentive for the more innovative firm to conduct safety and product innovation. We discuss how our results relate to the Calabresian idea (Calabresi, 1970) that the costs of accidents should be shifted to cheaper cost providers.