COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Post Office Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 716

"Product Warranties and Double Moral Hazard"

Russell Cooper and Thomas W. Ross

August 1984

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.

See CFP 630