Product Warranties and Double Moral Hazard

Russell Cooper and Thomas Ross

No 716, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale 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.

Pages: 24 pages
Date: 1984-08
Note: CFP 630.
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Citations: View citations in EconPapers (1)

Published in Rand Journal of Economics (Spring 1985), 16(1): 103-113

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