Product Liability and Moral Hazard: Evidence from General Aviation

Product liability law reduces the costs of accidents to consumers, thus reducing their incentives to invest in safety. We estimate the impact of tort liability on a subset of consumers who have significant control over the probability of an accident: the consumers of general aviation aircraft. The General Aviation Revitalization Act of 1994 exempted manufacturers of small aircraft from product liability claims when their aircraft reached 18 years of age. We use the exemption at age 18 to estimate the impact of tort liability on accidents as well as on a wide variety of behaviors and safety investments by pilots and owners. The results are consistent with moral hazard. When an aircraft is exempted from tort liability, the probability that the aircraft will be involved in an accident declines. Direct evidence of pilots’ and owners’ behavior is also consistent with moral hazard.

[1]  Daniel P. Kessler,et al.  Malpractice law and health care reform: optimal liability policy in an era of managed care , 2002 .

[2]  D. Andrews,et al.  Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis , 1992 .

[3]  Thomas W. Ross,et al.  Product Warranties and Double Moral Hazard , 1985 .

[4]  Bruce D. Meyer.  Unemployment Insurance and Unemployment Spells , 1988 .

[5]  Daniel P. Kessler,et al.  Do Doctors Practice Defensive Medicine? , 1996 .

[6]  Alessandro Lizzeri,et al.  Adverse Selection in Durable Goods Markets , 1997 .

[7]  David G. Duff,et al.  Exploring the Domain of Accident Law: Taking the Facts Seriously , 1996 .

[8]  Georges Dionne,et al.  Foundations of Economic Analysis of Law , 2006 .

[9]  David Loughran.  The Effect of No-Fault Automobile Insurance on Driver Behavior and Automobile Accidents in the United States , 2001 .

[10]  S. Peltzman.  The Effects of Automobile Safety Regulation , 1975, Journal of Political Economy.

[11]  Lindsey A. Greene,et al.  EHP.net: The General Accounting Office , 2000 .

[12]  E. M. Landes.  Insurance, Liability, and Accidents: A Theoretical and Empirical Investigation of the Effect of No-Fault Accidents , 1982, The Journal of Law and Economics.

[13]  Leslie E. Papke,et al.  Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates , 1993 .

[14]  Victor E. Schwartz,et al.  The General Aviation Revitalization Act: How Rational Civil Justice Reform Revitalized an Industry , 2002 .

[15]  M. Šitum,et al.  Value of life. , 2002, Croatian medical journal.

[16]  Using bootstrap methods to obtain nonnormality robust Chow prediction tests , 2002 .

[17]  Paul H. Rubin,et al.  Tort Reform and Accidental Deaths , 2007, The Journal of Law and Economics.

[18]  Thomas W. Gilligan.  Lemons and Leases in the Used Business Aircraft Market , 2003, Journal of Political Economy.