Title

Product Warranties and Double Moral Hazard

Document Type

Discussion Paper

Publication Date

8-1-1984

CFDP Number

716

CFDP Pages

24

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.

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