Durable Goods Warranties and Social Welfare

Abstract

In this paper, I investigate the effect warranties have on durable goods markets. Many if not 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 paper analyzes the signaling role of warranties by embedding a warranty into a framework of durable-goods monopolist. 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.

Keywords: warranty, durable goods market, aftermarket, asymmetric information

JEL Classification: D82, L12, L15