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Warranties As Signals Under Consumer Moral Hazard, Nancy A. Lutz

Cowles Foundation Discussion Papers

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 …