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. …