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Product Warranties and Double Moral Hazard

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Author Info

  • Russell Cooper
  • T.W. Ross

    (University of Chicago & Carleton University)

Abstract

This paper explores a model of warranties in which moral hazard problems play a key role. The goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage. We analyze a model in which buyers and sellers take actions which affect a product's performance. Since these actions are not cooperatively determined, an incentives problem arises. We characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality.

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File URL: http://cowles.econ.yale.edu/P/cd/d07a/d0716.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 716.

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Length: 24 pages
Date of creation: Aug 1984
Date of revision:
Publication status: Published in Rand Journal of Economics (Spring 1985), 16(1): 103-113
Handle: RePEc:cwl:cwldpp:716

Note: CFP 630.
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Web page: http://cowles.econ.yale.edu/
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Cited by:
  1. Robert Dur & Arjan Non & Hein Roelfsema, 2008. "Reciprocity and Incentive Pay in the Workplace," Tinbergen Institute Discussion Papers 08-080/1, Tinbergen Institute.
  2. Dybvig, Philip H & Lutz, Nancy A, 1993. "Warranties, Durability, and Maintenance: Two-Sided Moral Hazard in a Continuous-Time Model," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 575-97, July.
  3. Abraham Wickelgren, . "The Inefficiency of Contractually-Based Liability with Rational Consumers," American Law & Economics Association Annual Meetings 1061, American Law & Economics Association.
  4. Cason, Timothy & Savikhin, Anya & Sheremeta, Roman, 2011. "Behavioral Spillovers in Coordination Games," MPRA Paper 52106, University Library of Munich, Germany.
  5. Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," Carlo Alberto Notebooks 54, Collegio Carlo Alberto.
  6. Espinosa Alejos, María Paz & Kovarik, Jaromir & Ponti, Giovanni, 2010. "Strategic Interaction and Conventions," DFAEII Working Papers 2010-07, University of the Basque Country - Department of Foundations of Economic Analysis II.
  7. Mark Parry & Dipak Jain, 1987. "Quantity Discount Schemes for Channel Coordination," Discussion Papers 733, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Nancy A. Lutz, 1988. "Warranties as Signals Under Consumer Moral Hazard," Cowles Foundation Discussion Papers 867, Cowles Foundation for Research in Economics, Yale University.
  9. Robert Dur & Arjan Non & Hein Roelfsema, 2008. "Reciprocity and Incentive Pay in the Workplace," Tinbergen Institute Discussion Papers 08-080/1, Tinbergen Institute.
  10. Boom, Anette, 1998. "Product risk sharing by warranties in a monopoly market with risk-averse consumers," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 241-257, January.
  11. Aidan Hollis, 1996. "Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties," Working Papers ecpap-96-03, University of Toronto, Department of Economics.
  12. Schneider, Udo, 1998. "Der Arzt als Agent des Patienten: Zur Übertragbarkeit der Principal-Agent-Theorie auf die Arzt-Patient-Beziehung," Wirtschaftswissenschaftliche Diskussionspapiere 02/1998, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  13. Brian S. Collins & Robin Mansell, 2004. "Cyber trust and crime prevention: a synthesis of the state-of-the-art science reviews," LSE Research Online Documents on Economics 4252, London School of Economics and Political Science, LSE Library.
  14. Centner, Terence J. & Wetzstein, Michael E., 1995. "Obligations And Penalties Under Lemon Laws: Automobiles Versus Tractors," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 20(01), July.
  15. Chang, Juin-jen & Lai, Ching-chong & Lin, Chung-cheng, 2003. "Profit sharing, worker effort, and double-sided moral hazard in an efficiency wage model," Journal of Comparative Economics, Elsevier, vol. 31(1), pages 75-93, March.

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