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Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds under Asymmetric Information

Linda Welling ()

Canadian Journal of Economics, 1989, vol. 22, issue 1, 62-78

Abstract: Refunds are modeled as a competitive market response to asymmetric information. Firms have private information on their choice of product quality, and compete by offering pricerefund contracts. Consumers who care about quality draw inferences about the quality offered by the various firms from observed contracts. Conditions under which a revealing market equilibrium emerges are specified, and the equilibrium quality and contract(s) characterized. The model predicts that when product risk is not insurable, consumers with higher incomes will pay higher prices for higher-quality goods, with higher refunds if the product fails.

Date: 1989
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Working Paper: Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds Under Asymmetric Information (1986)
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Handle: RePEc:cje:issued:v:22:y:1989:i:1:p:62-78