Product liability and firm owners' delegation to overconfident managers.

This article examines the socially optimal allocation of liability in markets where Cournot firms delegate safety and output decisions to overconfident managers, while consumers misperceive product risks. It finds that firm owners always select managers who overestimate the effectiveness of safety measures, with the degree of overconfidence influenced by consumers' risk perceptions and the liability allocation between firms and consumers. When consumers overestimate product risks, full strict liability (firms compensating all consumer losses) is socially optimal; conversely, when consumers underestimate risks, it is optimal for consumers to bear part of the losses to better align safety and output with first-best levels. Extensions consider negligence and failure-to-warn regimes, showing that negligence can outperform strict liability under moderate consumer risk underestimation, and that results differ under Bertrand (price) competition where firms prefer underconfident managers. The analysis highlights the interaction between managerial bias, consumer risk perception, and liability design in shaping market outcomes and social welfare.