Product Liability and the Passage of Time: The Imprisonment of Corporate Rationality

In theory, the product liability system should induce manufacturers to invest in product safety at the socially optimal level, i.e., the level at which the marginal cost of the investment equals the marginal cost of product-related accidents thereby avoided. In reality, however, this inducement may be weakened by countervailing incentives, causing manufacturers in marginal cases to forgo investment that would appear to be cost-effective. Professor Henderson argues that in these cases corporate rationality has been imprisoned by two real-world phenomena. First, a manufacturer may postpone product improvements lest they be viewed by potential claimants and juries as a confession of fault with respect to accidents caused by products already on the market. Investment in product safety may not reach the optimal level because its marginal cost is inflated by a concomitant increase in liability exposure from old products. Second, this tendency to underinvest may be strengthened by conflicts of interest between the corporate manufacturer and the individuals who manage it. As in other areas of corporate life, the managers\u27 short term accountability may encourage them to defer long-term investment that may be in the best interests of the firm as a whole as well as of society. Professor Henderson concludes that the product liability system probably cannot free corporate managers from these restraints, but he suggests several ways to reduce the incentives that managers have, both as individuals and as representatives of their firms, to underinvest in product safety