Consumer misperceptions of harm

In the analysis that follows, consumer perceptions regarding the extent of expected harm that is embodied in the good will play a key role. In our setup, perceptions of expected harm depend on:

  • • Consumer perceptions of p(x), the probability that the good will actually cause harm; and
  • • Consumer perceptions of H, the harm that the good will actually cause if accidental damage occurs.

Depending on the legal rule that is in place, consumers who underestimate harm will behave very differently than those who overestimate harm. We summarise these perceptions by a single parameter, l > 0. If the expected harm per unit of the good consumed is H(x), then the consumer's perception or estimate of the expected harm is defined to be 1H(x). Thus, if l =1, the consumer perceives or estimates the expected harm accurately and does not have any misperceptions. On the other hand, if 0 < l < 1 then the consumer underperceives or underestimates the expected harm that consumption of the good will cause. For example, if l = 0 the consumer regards the good as being perfectly safe. This perception could indeed turn out to be correct, but, statistically speaking, it is a biased estimate of the true expected harm.

Finally, if l >1, then consumers overperceive or overestimate the expected harm from consumption of the good. Again, ex post, this perception could turn out to be correct, but statistically it is biased.

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