Document Type

Article

Abstract

Conventional law and economics wisdom suggests that efficiency is served by allowing purchasers of goods to waive strict liability. Intuition suggests that where purchasers can bear risk of product defects more cheaply than can sellers and manufacturers, laws should permit them to do so. However, even rational and completely informed buyers are vulnerable to a market failure, which this Article dubs “unraveling,” that may cause all buyers to successively waive strict liability even though it may be more efficient ex ante if they did not. This Article explains, models, and explores this unraveling phenomenon. It distinguishes the markets in which unraveling is likely to occur and concludes by suggesting rules and methodologies for pinpointing and preventing unraveling.

Date of Authorship for this Version

December 2006