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Warranties, Durability, and Maintenance: Two-Sided Moral Hazard in a Continuous-Time Model

  • Dybvig, Philip H
  • Lutz, Nancy A

Double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time. The more complete the warranty, the better the producer's durability incentives and the worse the consumer's maintenance incentives. Using continuous time highlights the need for some warranty bound to avoid reaching the first-best as an unreasonable limit. Early in the paper, an exogenous bound is used, while later the bound arises endogenously from the possibility of abuse and repair. A quadratic example shows that the warranty's duration depends on the relative severity of the two moral hazard problems. Copyright 1993 by The Review of Economic Studies Limited.

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Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 60 (1993)
Issue (Month): 3 (July)
Pages: 575-97

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Handle: RePEc:bla:restud:v:60:y:1993:i:3:p:575-97
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  1. Emons, Winand, 1988. "Warranties, moral hazard, and the lemons problem," Journal of Economic Theory, Elsevier, vol. 46(1), pages 16-33, October.
  2. Theodore Groves, 1974. "Information, Incentives and the Internalization of Production Externalities," Discussion Papers 87, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Russell Cooper & Thomas W. Ross, 1988. "An Intertemporal Model of Warranties," Canadian Journal of Economics, Canadian Economics Association, vol. 21(1), pages 72-86, February.
  4. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
  5. Mann, D.P. & Wissink, J.P., 1989. "Hidden Actions And Hidden Characteristics In Warranty Markets," Department of Economics Working Papers 133, Department of Economics, Williams College.
  6. Heal, Geoffrey, 1977. "Guarantees and Risk-Sharing," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 549-60, October.
  7. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer.
  8. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring.
  9. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
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