August, 2012

Product Liability and Moral Hazard: Evidence from General Aviation

  • Alexander Tabarrok

    Bartley J. Madden Chair in Economics, Mercatus Center at George Mason University
  • Eric Helland

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Product liability law reduces the costs of accidents to consumers, thus reducing their incentives to invest in safety. We estimate the impact of tort liability on a subset of consumers who have significant control over the probability of an accident: the consumers of general aviation aircraft. The General Aviation Revitalization Act of 1994 exempted manufacturers of small aircraft from product liability claims when their aircraft reached 18 years of age. We use the exemption at age 18 to estimate the impact of tort liability on accidents as well as on a wide variety of behaviors and safety investments by pilots and owners. The results are consistent with moral hazard. When an aircraft is exempted from tort liability, the probability that the aircraft will be involved in an accident declines. Direct evidence of pilots’ and owners’ behavior is also consistent with moral hazard.

Find the article at JSTOR.