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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)

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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/cp/p06a/p0630.pdf
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File URL: http://cowles.econ.yale.edu/P/cd/d07a/d0716.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 716.

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Length: 24 pages
Date of creation: Aug 1984
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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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  1. Nancy A. Lutz, 1988. "Warranties as Signals Under Consumer Moral Hazard," Cowles Foundation Discussion Papers 867, Cowles Foundation, Yale University. [Downloadable!]
  2. Holden, Stein & Bezabih, Mintewab, 2006. "Tenure Insecurity, Transaction Costs in the Land Lease Market and their Implications for Gendered Productivity Differentials," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25273, International Association of Agricultural Economists. [Downloadable!]
  3. Udo Schneider, 2004. "Asymmetric Information and the Demand for Health Care - the Case of Double Moral Hazard," HEW 0409001, EconWPA. [Downloadable!]
    Other versions:
  4. Thomas Gehrig & Peter-J. Jost, 1993. "Quacks, Lemons, and Self-Regulation: A Welfare Analysis," Discussion Papers 1057, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  5. Roosen, Jutta, 2003. "Marketing Of Safe Food Through Labeling," Journal of Food Distribution Research, Food Distribution Research Society, vol. 34(03), November. [Downloadable!]
  6. Li, Kunpeng & Chhajed, Dilip & Mallik, Suman, 2005. "Design of Extended Warranties in Supply Chains," Working Papers 05-0128, University of Illinois at Urbana-Champaign, College of Business. [Downloadable!]
  7. 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. [Downloadable!]
  8. Robert Dur & Arjan Non & Hein Roelfsema, 2008. "Reciprocity and Incentive Pay in the Workplace," Tinbergen Institute Discussion Papers 08-080/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  9. Abraham Wickelgren, . "The Inefficiency of Contractually-Based Liability with Rational Consumers," American Law & Economics Association Annual Meetings 1061, American Law & Economics Association. [Downloadable!]
  10. Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," PIER Working Paper Archive 07-021, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  11. Udo Schneider, 2002. "Beidseitige Informationsasymmetrien in der Arzt-Patient-Beziehung: Implikationen für die GKV," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 71(4), pages 447-458.
  12. 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. [Downloadable!]
  13. Anil Arya & Jonathan Glover & K. Sivaramakrishnan., . "The Interaction between Decision and Control Problems and the Value of Information," Corporate Finance & Organizations _016, Ohio State University. [Downloadable!]
  14. David Hakes & Dongsoo Shin, 2008. "Warranties as a device to extract rent from low-risk users of a product," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 1-7. [Downloadable!]
  15. Herrero & C., 2004. "On the Adjudication of Conflicting Claims: An Experimental Study," Econometric Society 2004 North American Summer Meetings 166, Econometric Society. [Downloadable!]
    Other versions:
  16. Udo Schneider & Volker Ulrich, 2008. "The physician-patient relationship revisited: the patient’s view," International Journal of Health Care Finance and Economics, Springer, vol. 8(4), pages 279-300, December. [Downloadable!] (restricted)
    Other versions:
  17. Roland Kirstein & Hans-Bernd Schäfer, . "Erzeugt der Europäische Verbraucherschutz Marktversagen? Eine informationsökonomische und empirische Analyse," German Working Papers in Law and Economics 2007-1-1172, Berkeley Electronic Press. [Downloadable!]
  18. Nancy A. Lutz & Philip H. Dybvig, 1989. "Warranties, Durability, and Maintenance: Two Sided Moral Hazard in a Continuous-Time Model," Cowles Foundation Discussion Papers 922, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  19. Giorgio Coricelli & Luigi Luini, 1999. "Double Moral Hazard: an Experiment on Warranties," CEEL Working Papers 9901, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
  20. Lupton, Sylvie, 2009. "Commerce équitable et signaux : entre information et illusion
    [Fair trade and signalling: information and illusion]    ," MPRA Paper 14560, University Library of Munich, Germany, revised 28 Mar 2009. [Downloadable!]
  21. Bijl, P. de, 1995. "Aftermarkets : the monopoly case," Discussion Paper 102, Tilburg University, Center for Economic Research. [Downloadable!]
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