Warranties and Risk Sharing
This study examines the extent to which warranties can represent risk sharing arrangements between consumers and the firm. In particular, we argue that this approach can explain limited warranties and limited warranty duration. The existing literature on warranties is ambivalent about the relationship between quality of products and warranties. In contrast, we argue that there is a definite relationship between warranties, technological complexity of products, and the degree to which consumers exercise due diligence in the use of the product. We also examine the relationship between warranty and the intensity of use by the consumer. It has also been demonstrated that risk aversion can explain the choice of extended warranties though the result is somewhat circumscribed. We also show that warranties and risk sharing aggravate the lemons problem instead of mitigating it.
KeywordsRisk Aversion Preventive Maintenance Risk Sharing Product Failure Great Warranty
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