The central hypothesis of this article is that liability regulation can foster firms’ incentives to study the (potential) dangers of their products. We discuss alternative views and develop a formal model to analyze a firm´s incentive structure under the application of hindsight liability.
We find a new role for liability regulation: to foster voluntary investment in research aimed at detecting potential risks in new products. The model allows us to analyze the firm´s investment decisions in research under different scenarios, each of which has varying expected costs. We offer some alternatives for institutional design seeking incentive compatibility with the aim proposed.