Preventive Investment, Malfunctions and Liability
We study the optimal decision to undertake a preventive investment by a firm operating in a market with uncertain demand and whose products are subject to a risk of malfunction. It has an incentive to do so because malfunctions have two negative effects on its revenue. First, every malfunction is associated with some direct costs, consisting of, e.g., paying legal fees, fines, additional insurance costs, and costs of investigating the malfunction. Second, every malfunction makes the product less attractive, affecting product demand. Our model explicitly accounts for the degree of the firm’s liability, which influences these two effects. On the one hand, if the firm is more liable, this increases the firm’s direct costs. On the other hand, if the consumer is more liable, this results in a larger negative demand effect. The paper first of all determines the optimal time and size of the preventive investment, where it is recognized that the optimal investment decision depends on the liability rule. We then determine the liability rule that steers this investment decision in such a way that malfunction damage is minimized
Year of publication: |
2022
|
---|---|
Authors: | Nunes, Cláudia ; Kort, Peter M. ; Lavrutich, Maria ; Oliveira, Carlos |
Publisher: |
[S.l.] : SSRN |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Preventive investment, malfunctions and liability
Kort, Peter M., (2023)
-
Preventing environmental disasters in investment under uncertainty
Kort, Peter M., (2022)
-
Investment decisions with two-factor uncertainty
Compernolle, Tine, (2021)
- More ...