The name is absent

Kathleen Segerson

(10)                 P(q) -C_y-SqBD = 0

and

(H)                 P'(q)y-C₄-SBDy = O.

Clearly, if s=0 or β=0, implying that the firm does not expect to make any
damage payments (either because it is unaware of the damages or thinks it
will not be forced to pay for them), and P'(q)=0, implying that demand is
unresponsive to food safety (as might be expected, for example, with
credence goods), then the firm will have no incentive to invest in reducing
q. Thus, the incentive to invest in food safety measures stems either from
the expectation of damage payments and/or the responsiveness of
demand.³⁸

Condition (8) implies that in equilibrium

(12)                   P(q) = B'(y) - (l-s)q D.

Substituting this into (10) yields

(13)            B'(y)-(l-s)q D-C_y-SqBD = O,

or equivalently,

(13')               B'(y) -Cy -[(l-s) +sB]qD = 0.

We first consider the implications of these conditions for the equilibrium
level of output. Consider first the case where there are no misperceptions,
i.e.,    =β=l. As noted above, this might be the case for search or

experience goods for which food safety is readily discernable to both the
producer and the consumer. Comparing (13)' to (5) implies that in this
case, for a given level of q, the firm will choose the efficient output level
regardless of the value of s. In other words, the equilibrium output level is
efficient (given q) and independent of whether the firm compensates the
consumer for some or all of the damages from any contamination that
occurs. This is the standard "irrelevance" result from the literature on
products liability (Landes and Posner, 1985).

Suppose, however, that the good is a credence good with =0,
implying that the consumer is unaware (and unable to discover) the food
safety hazards associated with consumption of the product. In this case,
even if the firm is fully aware of potential damages (i.e., β=l), it will
overproduce (and the consumer will over consume) the good whenever it

³⁸ This is consistent with the result in the previous section. See, in particular,
(2').

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