Free trade and undistorted competition: the contribution of the European Directive on liability for defective products

Abstract

In this paper, we study the effects of a uniform application of the principle of strict product liability on international trade. We concentrate on a setting with imperfect competition, heterogeneous consumers and firms producing vertically differentiated products. The study highlights that despite consumers' perfect information about accident risks, a unilateral introduction of strict product liability in a single country can induce distortions that can be avoided by its uniform application. However, taking the model's simplifying assumptions into account, the effects appear limited in size.