Strict Product Liability and Safety: Evidence from the General Aviation Market
Nelson, Randy A., Drews, James N., Economic Inquiry
Beginning in the 1960s, the legal system in the United States began a gradual transition to a standard of strict product liability. The proponents of the strict liability standard argued that such a move would enhance both economic efficiency and safety by placing the burden of accident prevention on manufacturers, who presumably have lower marginal costs of preventing accidents than consumers. (1) In addition, it was argued that the adoption of a strict liability standard would make it easier for consumers to obtain financial compensation from manufacturers for any injuries that they suffered.
A key component of the strict liability standard is the notion of design defect, according to which a manufacturer can be held liable if the risk of product injuries exceeds the product's utility based on current design standards. (2) The manufacturers of short-lived goods deemed to be guilty of design defect may replace existing products with safer versions, passing on the higher costs associated with accident prevention and liability insurance to consumers in the form of price increases. (3) The manufacturers of long-lived products, however, may be physically or financially unable to retrofit previously sold items to bring them up to current design standards, thus exposing manufacturers to retroactive liability for goods sold in the past. In this situation, the manufacturers of long-lived products are faced with one of two choices: (a) absorb the increased costs in the form of lower profits or (b) attempt to pass on the liability costs for the previously sold units to new customers in the form of higher prices. This latter scenario may lead to a downward spiral in which sales fall, leading producers to further price increases in an effort to recoup the sunk liability costs from an ever-declining number of new units sold.
One of the industries hardest hit by the change in liability standards was the general aviation (GA) industry. Martin (1991), Pattillo (1998), Priest (1991), Stimpson (1988), and Viscusi (1991), among others, have discussed the devastating impact of strict product liability on the manufacturers of GA aircraft. (4) GA planes are an example of a durable good with extremely long service lives; in 2005, the average age of the GA fleet in the United States was 34 yr. Although 75%-85% of GA accidents are attributed to pilot error, 90% of all accidents involving a fatality or serious injury result in a lawsuit against aircraft manufacturers. (5) As a result of the increase in litigation, claims and other legal expenses for aircraft manufacturers and their suppliers increased from $24 million in 1976 to $210 million in 1986, an increase of 775%. (6) As manufacturers attempted to pass on the higher liability costs by increasing prices, sales of new aircraft over the same period declined by 90%, from 15,451 units in 1976 to 1,495 units in 1986 according to the General Aviation Manufacturers Association (2006).
Supporters of the move to a strict liability standard in the GA market have argued that it forced manufacturers to cease production of outmoded models of aircraft that suffered from design flaws and manufacturing defects, thus improving the level of safety. This claim, they argue, is consistent with the fact that GA accidents and fatalities declined following the transition to the strict liability standard. (7) Martin (1991, 86-87), however, argues that
in formulating the rule of strict liability ... no one considered the distinction between products purchased and used as capital items with a long service life and those purchased as consumables ... General aviation airplanes are prime examples of a capital item that has a long service life. Each general aviation airplane in the active U.S. fleet that carries a manufacturer's data plate represents a separate product liability risk to that manufacturer. The cost of that risk, whether self-insured or under-written, must be paid each year. On the income side of the ledger, the manufacturer's selling price for the airplane is fixed when it is sold ... On the expense side, however, the account remains open for the life of the airplane under the rule of strict liability.... When one considers that the expense side of the ledger will remain open, on average, thirty to forty years, ... it is not surprising to find that an industry such as the manufacture of small airplanes can be self-liquidating.
The loss of small plane manufacturing in the United States may be a price worth paying if it led to improved safety in the GA industry. Some critics, however, have argued that the change in liability standards, and consequent near elimination of the new plane market, may have compromised safety for three reasons. (8) First, much of the new technology in the GA industry, including more reliable engines, better avionics, safer fuel systems, and so on, are introduced into the market imbedded in new planes; the near demise of the new plane market after 1980 greatly impeded the diffusion of these capital-embodied technologies. In this regard, the GA industry is similar to the automobile industry in that new innovations such as airbags, antilock breaks, and stability control systems are embedded in new cars. Had the sale on new cars declined by 90% after 1980, it is unlikely that any of these innovations would have made it to the market, thus reducing driving safety. This argument is consistent with the evidence presented by the Boeing Corporation (2006) in their analysis of commercial jet accidents over the period 19592005. First-generation jets were found to have accident rates significantly above those of second-generation planes, with the difference positively related to the number of years since introduction. In addition, second-generation aircraft and early wide-body planes were generally found to have higher accident rates than current-generation planes. Although it may be possible to retrofit some models of older planes with new technology, it may be difficult or impossible to retrofit the "orphan" planes manufactured by firms no longer in existence or models of aircraft that are no longer produced by existing manufacturers like Cessna who have sharply limited the number of different models of GA aircraft they produce.
Second, the sharp reduction in the sale of new planes after 1980 resulted in an increase in the average age of the GA fleet, forcing pilots to fly older planes that may have higher accident rates because they are more prone to age-related structural failures and mechanical breakdowns. The bulk of the current GA fleet was designed to Civil Aviation Regulations 3 standards that did not require any design life specifications for certification; current standards specify the service life of certain components. Even though it is possible to repower existing planes with new engines, older aircrafts are more susceptible to problems from corrosion and brittle electrical wiring. (9) In September of 2003, the Aircraft Owners and Pilots Association (AOPA), the Antique Airplane Association, the Experimental Aircraft Association (EAA), and the Federal Aviation Administration (FAA) issued their Best Practices Guide for Maintaining Aging General Aviation Airplanes, which stated that "The GA Fleet is being used well beyond the flight hours and years envisioned when the airplanes were designed. There is concern that continued airworthiness safety matters will become more common as the fleet ages." (10)
Finally, the number of amateur-built aircraft in the United States increased by approximately 674% between 1971 and 2000. Some industry analysts have attributed the growth of the amateur-built fleet, which have higher accident rates than planes built by traditional manufacturers, to the decrease in the sales of new GA aircraft. (11) Martin (1991) has argued that these factors may explain why the GA accident rate declined more rapidly prior to the change in liability standards (1950-1969) than after the adoption of strict liability standard (1970-1989).
The purpose of the present study is to determine what, if any, impact the adoption of a strict liability standard had on the accident rate in the GA industry. In Section II, we provide a brief overview of the industry, while Section III examines the relationship between the aggregate accident rate and the new plane shipments. We employ model-specific data on accident rates and average age to test the hypothesis that older planes have higher accident rates than newer planes in Section IV. In addition, in this section we test the hypothesis …
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Publication information: Article title: Strict Product Liability and Safety: Evidence from the General Aviation Market. Contributors: Nelson, Randy A. - Author, Drews, James N. - Author. Journal title: Economic Inquiry. Volume: 46. Issue: 3 Publication date: July 2008. Page number: 425+. © 2003 Western Economic Association International. COPYRIGHT 2008 Gale Group.