Product Safety and Liability with Deceptive Advertising and Moral Hazard.

This article analyzes how two common product liability rules—strict liability and comparative negligence—affect firms and consumers when firms can deceptively advertise product quality and consumers choose their precaution efforts endogenously. Under strict liability, firms bear full responsibility for product failures, incentivizing truthful advertising of low-quality products to encourage consumer caution, which can improve firm profits and product safety. In contrast, comparative negligence allocates liability based on the negligence of both parties but tends to encourage deceptive advertising by low-quality firms, leading to pooling equilibria where consumers overestimate product quality and exert less precaution, potentially reducing safety and firm profits. The study finds that penalties imposed on firms have no effect under comparative negligence but can influence advertising honesty and consumer behavior under strict liability, sometimes increasing firm profits and product safety for intermediate penalty levels. Extensions considering price signaling, advertising penalties, consumer heterogeneity, and the substitutability or complementarity of product quality and precaution effort support these findings, highlighting that strict liability may better promote truthful information disclosure and safer consumer behavior in contexts of asymmetric information.