Digitized by the Internet Archive in 2011 with Funding from Product Safety, Liability Rules and Retailer Bankruptcy] Product Safety, Liability Rules and Retailer Bankruptcy Received Product Safety, Liability Rules and Retailer Bankrupcty

In this paper, we examine the levels of care which would be chosen by a monopolistic manufacturer and competitive retailer, when both the manufacturer and retailer can affect the probability of an accident and when the manufacturer cannot observe ex ante the care chosen by the retailer. We show that if retailer bankruptcy is not possible, retailer liability is superior to manufacturer liability. If retailer bankruptcy is possible, the equilibrium contract between the manufacturer and retailer will include positive profits for the retailer and inefficient levels of care. Society can improve on the equilibrium contract by either increasing the retailer's share of liability or by increasing the retailer's "due care standard". If bankruptcy costs are sufficiently high, the positive profits and inefficiencies are eliminated .