Warranties as Signals under Consumer Moral Hazard
In this paper, I examine whether and how warranties serve as signals of product quality in an environment where there are opportunities for consumer moral hazard. My model is very similar to Grossman’s. A risk neutral monopolist produced a good of ﬁxed and exogenous quality. This product is oﬀered to a market of identical risk-averse consumers, and it can be bundled with a warranty of the monopolist’s choosing. The probability that the product breaks down is a function of its quality and the eﬀort the consumer takes in using it. This consumer eﬀort cannot be observed by the monopolist or any third party, so that the warranty cannot be made conditional on the eﬀort taken, and in choosing the warranty the monopolist must take the moral hazard problem into account.
Lutz, Nancy A., "Warranties as Signals under Consumer Moral Hazard" (1988). Cowles Foundation Discussion Papers. 1110.