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Optimal Product Quality under Asymmetric Information and Moral Hazard

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  • John Kambhu

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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  • John Kambhu, 1982. "Optimal Product Quality under Asymmetric Information and Moral Hazard," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 483-492, Autumn.
    • Handle: RePEc:rje:bellje:v:13:y:1982:i:autumn:p:483-492
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    Cited by:

    1. Nina Boyarchenko & Anna M. Costello, 2014. "Counterparty risk in material supply contracts," Staff Reports 694, Federal Reserve Bank of New York.
    2. Ignatius J. Horstmann & Frank Mathewson & Neil Quigley, 2005. "Agency Contracts with Long-Term Customer Relationships," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 589-608, July.
    3. Kai-Lung Hui & Ping Fan Ke & Yuxi Yao & Wei T. Yue, 2019. "Bilateral Liability-Based Contracts in Information Security Outsourcing," Information Systems Research, INFORMS, vol. 30(2), pages 411-429, June.
    4. 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, February.
    5. 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.
    6. Dur, Robert & Non, Arjan & Roelfsema, Hein, 2010. "Reciprocity and incentive pay in the workplace," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 676-686, August.
    7. E. Erjiang & Ming Yu & Geng Peng, 2022. "Intermediation in reward-based crowdfunding: a cash deposit mechanism to reduce moral hazard," Electronic Commerce Research, Springer, vol. 22(4), pages 1227-1248, December.
    8. Tim Friehe & Tobias Tröger, 2012. "Sequencing of remedies in sales law," European Journal of Law and Economics, Springer, vol. 33(1), pages 159-184, February.
    9. 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.
    10. O'Brien, Daniel P., 2017. "All-units discounts and double moral hazard," Journal of Economic Theory, Elsevier, vol. 170(C), pages 1-28.

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