Journal of Law, Economics, and Organization Advance Access published online on September 9, 2009
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewp024
Product Recall and Liability
Hong Kong University of Science and Technology
* Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Email: xyhua{at}ust.hk.
This article examines a firm's incentives to recall its product after learning that the product may harm consumers. It discusses whether courts should protect consumers who do not comply with recalls. Under the "no duty to return" rule, the firm bears the same liability no matter whether it has made a recall or not. The firm then may not recall the product as often as socially desired or provide insufficient reimbursement for consumers’ return costs. In contrast, the "full duty to return" rule denies the firm's future liabilities after it makes a recall. More consumers then return the product, which may reduce the firm's incentives to recall the product. We show that the "full duty to return" rule may or may not generate more product recalls or higher social welfare. We also discuss the "partial duty to return" rule, which partially reduces the firm's liability after it makes a recall. (JEL K13, L15)