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Optimal Product Quality under Asymmetric Information and Moral Hazard

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  • John Kambhu
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    Abstract

    In the use of incentive contracts to compel a supplier to produce a product of optimal quality, the supplier's payoff typically depends on observed product quality. When the observable measure of quality employed in the contract varies also with the buyer's care or maintenance of the product, it becomes impossible to impute the product's performance to two unobservable casual determinants: innate product quality and buyer's care. In this article we characterize and give examples of the types of mechanisms that can be used to obtain the optimum optimorum allocation. In the context of product quality and product liability problems there exist mechanisms that can avoid the moral hazard problem.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 13 (1982)
    Issue (Month): 2 (Autumn)
    Pages: 483-492

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    Handle: RePEc:rje:bellje:v:13:y:1982:i:autumn:p:483-492

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    Cited by:
    1. Ram Singh, 2002. "Characterization of Efficient Product Liability Rules: When Consumers are Imperfectly Informed," Working papers 110, Centre for Development Economics, Delhi School of Economics.
    2. Giorgio Coricelli & Luigi Luini, 1999. "Double Moral Hazard: an Experiment on Warranties," CEEL Working Papers 9901, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    3. Robert Dur & Arjan Non & Hein Roelfsema, 2008. "Reciprocity and Incentive Pay in the Workplace," Tinbergen Institute Discussion Papers 08-080/1, Tinbergen Institute.
    4. Tim Friehe & Tobias H. Tröger, . "Sequencing of Remedies in Sales Law," German Working Papers in Law and Economics 2008-1-1224, Berkeley Electronic Press.
    5. repec:dgr:uvatin:2008080 is not listed on IDEAS
    6. Ram Singh, 2009. "RISK, INFORMATIONAL ASYMMETRY AND PRODUCT LIABILITY: An Enquiry Into Conflicting Objectives," Pacific Economic Review, Wiley Blackwell, vol. 14(1), pages 89-112, 02.

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