A MODEL OF PRODUCT RECALLS WITH ASYMMETRIC INFORMATION

This paper presents a model of involuntary product recall in which a f irm has private information on its ability to produce safety. The ex p ost regulation of safety is motivated through a parametric imperfectio n in the product liability system which results in a firm under intern alizing expected liability expenses. We treat the problem as one of me chanism design, where the regulator designs a recall procedure. This f ramework illuminates the point that recall is an interesting blend of ex ante and ex post regulation. We characterize a perfect recall proce dure, contrast this with real world imperfect procedures, and study th e interaction of the recall and the liability systems. Further, we ana lyze the interaction between optimal recall policy and product market structure.