Durable-Goods Warranties and Social Welfare

Abstract

In this article, I investigate the effect warranties have on durable-goods markets. Many if not most goods that are sold with a warranty are durable goods; thus, it is extremely important to consider the role of warranties in a durable-goods setting. This article analyzes the signaling role of warranties by embedding a warranty into a framework of durable-goods monopolists. I investigate the monopolist's decision regarding what level of reliability he should offer for his products and whether he should offer to repair them. It is shown that the warranty solves the moral hazard problem of whether more reliable products should be provided. Remarkably, if a warranty can be offered, asymmetric information can improve social welfare. Copyright 2006, Oxford University Press.