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Product Warranties and Double Moral Hazard

Author

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  • 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.

Suggested Citation

  • Russell Cooper & T.W. Ross, 1984. "Product Warranties and Double Moral Hazard," Cowles Foundation Discussion Papers 716, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:716
    Note: CFP 630.
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