Warranties without Commitment to Market Participation

John Bigelow, Russell Cooper and Thomas Ross

International Economic Review, 1993, vol. 34, issue 1, 85-100

Abstract: The provision of product warranties when the exit of firms is possible is an example of a more general contracting proble m without full commitment. When firms cannot precommit to future mark et participation, they can exit if continued participation is not profitable, thereby avoiding outstanding warranty obligations. Incentives for market participation come from future profits that depend on future sales. The resulting intertemporal linkage between cohorts of consumers may create multiple, Pareto-ordered equilibria. The possibility of multiple equilibria is examined for alternative market structures as is the government's role in influencing the selection of an equilibrium. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1993
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Working Paper: WARRANTIES WITHOUT COMMITMENT TO MARKET PARTICIPATION (1988)
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