Double moral hazard: an experiment on warranties

Coricelli, Giorgio and Luni, Luigi (1999) Double moral hazard: an experiment on warranties. Technical Report 1, CEEL (Computable and Experimental Economics Laboratory).

Abstract

The paper designs a two-stage experiment to analyze a market for durable goods with warranties. In such a market double moral hazard may arise as the seller can reduce (increase) the initial quality of the product sold, while the buyer can reduce (increase) the maintenance effort. In the first stage of the experiment we analyze the impact of the warranty on the equilibrium levels of the initial quality of the product and the effort of the buyer. In this respect, we show the suboptimality of the equilibria with
warranty. In the second stage, we analyze the role of signaling and reputation in an intertemporal model. In this context the final quality of the product depends on whether quality and effort are complements or substitutes.