money back warranties vs replacement warranties a simple comparaison product warranties are one of the most common time honored and visible contractual relationships entered into by consumers moreover under the uniform commercial code consumers are covered by an implied warranty of merchantability even without a written warranty in this paper we compare the outcomes of two contrasting types of consumer product warranties money back warranties and replacement warranties both these types of warranties are ubiquitous in fact a best and a r andreasen 1977 find that returning an item is the most common action taken by dissatisfied consumers c l kendall and f a russ 1975 in a study of the consumer packaged goods industry find that money back and new merchandise are the two most common responses made by firms to consumer complaints yet as our analysis shows there are significant differences in the incentives they provide firms and in their welfare properties in particular we find that the comparison depends crucially on the observability of quality and on the cost of servicing warranties although there are certainly more complicated explanations for warranties we rely on a simple model of imperfect consumer information in which to embed our comparison of the relative performance of these two forms of warranty consumers are confronted by seller moral hazard that is either they are unable to discern the quality of a product before purchase or alternatively this information is extremely costly for consumers to obtain or for firms to publicly demonstrate we abstract from issues such as differing degrees of risk aversion consumer moral hazard and screening each of which is frequently the rationale behind warranty provision our model is perhaps closest to the model presented in michael spence s 1977 article in which he analyzes the provision of warranties in an environment with biased consumer information

gathering imperfect information before signing a contract i study information gathering for rent seeking purposes in contracting in my model an agent learns his payoff type only after accepting a contract but can at costs acquire imperfect information while deliberating whether to accept i show that the principal deters the acquisition if and only if the costs are high the result stands in contrast to a finding by cremer and khalil 1992 who demonstrate that the acquisition of perfect information will always be deterred a key insight is that the case of imperfect information is an instance of a sequential screening problem

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

exit options in incomplete contracts with asymmetric information this paper analyzes bilateral contracting in an environment with contractual incompleteness and asymmetric information one party the seller makes an unverifiable quality choice and the other party the buyer has private information about its valuation a simple exit option contract which allows the buyer to refuse trade achieves the first best in the benchmark cases where either quality is verifiable or the buyer s valuation is public information but when unverifiable and asymmetric information are combined exit options induce inefficient pooling and lead to a particularly simplecontract inefficient pooling is unavoidable also under the most general form of contracts which make trade conditional on the exchange of messages between the parties indeed simple exit option contracts are optimal if random mechanisms are ruled out

goodwill can hurt a theoretical and experimental investigation of return policies in auctions abstract will generous return policies in auctions benefit bidders we investigate this issue using second price common value auctions theoretically we find that the symmetric bidding equilibrium is unique unless returns are free and when returns are free there exist multiple equilibria with different implications for sellers moreover more generous return policies mitigate the winner s curse but also push the bids higher thus hurting bidders by eroding their surplus in the experiment bids increase and bidders earnings decrease with more generous return policies as predicted with free returns many bidders bid above the highest possible value subsequently returning the item regardless of value though consistent with equilibrium behavior this is not optimal for sellers

farm income support with minimal trade distortions abstract the stalemate in the gatt negotiations on agriculture is due to us insistence on the elimination of all subsidies while the european community and japan demand the right to support farmers this paper presents an alternative called production entitlement guarantees pegs that allow countries to satisfy farm support objectives yet minimize trade distortions pegs involve a limit on production receiving payments only the removal of all other forms of trade distorting market interventions is required such that consumers pay world market prices pegs would be negotiated and bound in the gatt and represent a politically acceptable method of supporting farm incomes

progressive screening long term contracting with a privately known stochastic process we examine a model of long term contracting in which the buyer is privately informed about the stochastic process by which her value for a good evolves in addition the realized values are also private information we characterize a class of environments in which the profit maximizing long term contract offered by a monopolist takes an especially simple structure we derive sufficient conditions on primitives under which the optimal contract consists of a menu of deterministic sequences of static contracts within each sequence higher realized values lead to greater quantity provision however an increasing proportion of buyer types are excluded over time eventually leading to inefficiently early termination of the relationship moreover the menu choices differ by future generosity with more costly up front plans guaranteeing greater quantity provision in the future thus the seller screens process information in the initial period and then progressively screens across realized values so as to reduce the information rents paid in future periods copyright oxford university press

pre sale information in markets as diverse as that for specialized industrial equipment or that for retail financial services sellers or intermediaries may earn profits both from the sale of products and from the provision of pre sale consultation services we study how a seller optimally chooses the costly quality of pre sale information next to the price of information and the product price and obtain clear cut predictions on when information is over and when it is underprovided even though we find that information quality does not satisfy a standard single crossing property buyers who are a priori more optimistic about their valuation end up paying a higher margin for information but a lower margin for the product when they subsequently exercise their option to purchase at a pre specified price

optimal procurement contracts with pre project planning the paper studies procurement contracts with pre project investigations in the presence of adverse selection and moral hazard to model the procurer s problem we extend a standard sequential screening model to endogenous information acquisition with moral hazard the optimal contract displays system atic distortions in information acquisition due to a rent effect adverse selection induces too much infor mation acquisition to prevent cost overruns and too little information acquisition to prevent false project cancellations moral hazard mitigates the distortions related to cost overruns yet exacerbates those related to false negatives the optimal mechanism is a menu of option contracts that achieves the dual goal of providing incentives for information acquisition and truthful information revelation

the gender wage gap and domestic violence three quarters of all violence against women is perpetrated by domestic partners this study exploits exogenous changes in the demand for labor in female dominated industries to estimate the impact of the male female wage gap on domestic violence decreases in the wage gap reduce violence against women consistent with a household bargaining model these findings shed new light on the health production process as well as observed income gradients in health and suggest that in addition to addressing concerns of equity and efficiency pay parity can also improve the health of american women via reductions in violence

the price of advice we develop a model of consulting advising where the role of the consultant is to reveal signals to her client that refine the client s original private estimate of the profitability of a project although the client can perfectly observe and evaluate these signals the consultant may only be able to do the same imperfectly or not at all this captures the idea that the expert may not fully understand the impact of her advice on the client we characterize the optimal contract between the consultant and her client it is a menu consisting of pairs of transfers specifying payments between the two parties in case the project is undertaken by the client and in case it is not the main result of the article is that in the optimal mechanism the consultant obtains the same profit as though she could perfectly observe and evaluate the impact of the signals whose release she controls on the client s profit estimate

optimal selling strategies when to haggle when to hold firm a seller encountering risk neutral buyers one at a time should if commitments are feasible quote a single take it or leave it price to each this strategy is superior to any other for finite or infinite buyer populations whether there is learning or the distribution of buyer prices is known at the outset with one object for sale or many although haggling may offer advantages in terms of price discrimination these gains are more than offset by the losses it generates by encouraging buyers to refuse purchases at high prices

a search model of costly product returns abstract this paper analyses a market in which consumers buy horizontally differentiated products without knowing their exact valuations by paying return costs the consumers may return less preferred items and obtain refunds the consumers shop sequentially and their shopping strategy is similar to the search strategy of a consumer in a sequential costly search model thus the pricing strategies of firms are identical to those in a price directed sequential search model price competition is more intense and the symmetric equilibrium price is lower when returns are costlier as a result consumer surplus is increasing in the return cost

sales talk cancellation terms and the role of consumer protection this paper analyses contract cancellation and product return policies in mar kets in which sellers advise customers about the suitability of their oering when customers are fully rational it is optimal for sellers to oer the right to cancel or return on favorable terms a generous return policy makes the seller s cheap talk at the point of sale credible this observation provides a possible explanation for the excess refund puzzle and also has implications for the management of customer reviews when customers are credulous instead sellers have an incentive to set unfavorable terms to exploit the in ated beliefs they induce in their customers the imposition of a minimum statutory standard even if it is not binding can improve welfare and consumer surplus when at least some customers are credulous in con trast competition policy reduces contractual ine ciencies with rational customers but it is not eective with credulous customers

cross subsidization due to inframarginal support in agriculture a general theory and empirical evidence a general theory of cross subsidization due to inframarginal support is developed two sources of output distortion are identified exit deterrence and extramarginal output some firms would not be in business without the subsidy cost savings due to declining average costs are always greater than the losses incurred where price equals marginal cost moreover it is theoretically possible for inframarginal subsidies to expand output more than equivalent fully coupled subsidies empirical analysis of u s dairy subsidies isolates these components of cross subsidization and finds distortions from inframarginal support to be substantial with implications for trade negotiations dispute settlement and policy formulation copyright 2008 oxford university press

the theory of warranty contracts abstract this paper surveys theories of the existence and design of warranty contracts insurance signalling and incentive motives are used to explain the existence of warranties the incorporation of imperfections that prevent warranties from serving their basic purposes in a first best way describes actual warranty practices

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

restricting the market for quota an analysis of tobacco production rights with corroboration from congressional testimony regulatory programs that restrict output levels often impose restrictions on the transfer of rights to produce or to use particular inputs in this paper we use a unique cross section time series data set from north carolina to quantify the welfare effects of transfer restrictions for poundage quota under the u s flue cured tobacco program we find that the deadweight costs of such restrictions are small but that the distributional effects are substantial we analyze congressional testimony on quota transfer legislation and conclude that our estimates of the distributional effects are consistent with expressed views of market participants

missed sales and the pricing of ancillary goods firms often sell a basic good as well as ancillary ones hold up concerns have led to ancillary good regulations such as transparency and price caps the hold up narrative however runs counter to evidence in many retail settings where ancillary good prices are set below cost e g free shipping or limited card surcharging in countries where the no surcharge rule was lifted we argue that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good s cost so as not to miss sales on the basic good a supplier with market power on the ancillary good market then takes advantage of cost absorption and jacks up its wholesale price hold ups occur only when consumers are initially uninformed or naive about the drip price and shopping costs are high the price of the basic good then acts as a signal of the drip price since a high markup on the basic good makes the firm more wary of missed sales regardless of whether consumers are informed uninformed but rational or naive mandating price transparency and banning loss making on the ancillary good leads to i an efficient consumption of the ancillary good and ii a reduction of its wholesale price generating strict welfare gains

informing consumers about their own preferences we analyze a model of monopolistic price discrimination where only some consumers are originally sufficiently informed about their preferences e g about their future demand for a utility such as electricity or telecommunication when more consumers become informed we show that this benefits also those consumers who remain uninformed as it reduces the firm s incentives to extract information rent by reducing the costs of information acquisition or forcing firms to supply consumers with the respective information about past usage policy can further improve welfare as contracts become more efficient the last observation stands in contrast to earlier findings by cremer and khalil american economic review 1992 where all consumers are uninformed

long term contracting with markovian consumers to study how a firm can capitalize on a long term customer relationship we characterize the optimal contract between a monopolist and a consumer whose preferences follow a markov process the optimal contract is nonstationary and has infinite memory but is described by a simple state variable under general conditions supply converges to the efficient level for any degree of persistence of the types and along any history though convergence is history dependent in contrast as with constant types the optimal contract can be renegotiation proof even with highly persistent types these properties provide insights into the optimal ownership structure of the production technology

can the small dairy farm remain competitive in us agriculture smaller dairy farms in the us are observed to have higher costs than larger farms and whether those higher costs are due to technology or inefficiency has implications for policy to address the small farm if high cost of production on smaller farms is due to a higher cost frontier then to make small farms competitive would require research to devise and design technology that is suitable for small farms if instead high cost is due to inefficiency then educational approaches are needed to ensure small dairy farms use technology efficiently to determine the cause of higher costs on small farms the cost of milk production by farm size was decomposed into frontier and efficiency components with a stochastic cost curve using data on usa dairy farms although the frontier cost of production decreases with farm size that cost reduction is not as pronounced as a cost curve that includes inefficiency the higher cost of production on many smaller farms is caused by inefficiency rather than technology

disentangling the consequences of direct payment schemes in agriculture on fixed costs exit decisions and output this paper goes beyond orthodox considerations of direct payment effects on agricultural output by highlighting the role of subsidies in affecting individual producers ability to cover fixed costs and in distorting the volume of aggregate production and net trade by implicitly discouraging exits the theoretical model considers both taxpayer and consumer financed decoupled direct payment schemes and compares them to a coupled production subsidy in terms of possible producer responses to direct payments the paper proposes an analytical framework of production decision making in the presence of a stochastic distribution of fixed costs across representative farms the paper shows that decoupled payments in theory can have a larger effect on output than coupled payments the model explicitly recognizes three consequences of domestic support a induce exit or entry b bias production incentives to domestic markets and c cross subsidize export in global markets an empirical model of the u s wheat sector is developed to illustrate the relative potential impacts of coupled versus decoupled payments on output through the effects on a farmer s ability to cover fixed costs and hence exit decisions

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

advance purchase discounts as a price discrimination device in an intertemporal setting in which individual uncertainty is resolved over time advance purchase discounts can serve to price discriminate between consumers with different expected valuations for the product consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance purchase discount consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high we characterize the profitmaximizing pricing strategy of the monopolist furthermore adopting a mechanism design perspective we provide a necessary and sufficient condition under which advance purchase discounts implement the monopolist s optimal mechanism

optimal sales contracts with withdrawal rights we introduce ex post participation constraints in the standard sequential screening model this captures the presence of consumer withdrawal rights as for instance mandated by european union regulation of distance sales contracts with such additional constraints the optimal contract is static and unlike with only ex ante participation constraints does not elicit the agent s information sequentially this holds whenever differences in ex ante and ex post outside options are below a positive upper bound welfare effects of mandatory withdrawal rights are ambiguous since it is insufficient in our setting to consider only local incentive constraints we develop a novel technique to identify the relevant global constraints

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

optimal information disclosure in auctions and the handicap auction we analyze a situation where a monopolist is selling an indivisible good to risk neutral buyers who only have an estimate of their private valuations the seller can release without observing certain additional signals that affect the buyers valuations our main result is that in the expected revenue maximizing mechanism the seller makes available all the information that she can and her expected revenue is the same as it would be if she could observe the part of the information that is new to the buyers we also show that this mechanism can be implemented by what we call a handicap auction in interesting applications in the first round of this auction each buyer picks a price premium from a menu offered by the seller a smaller premium costs more then the seller releases the additional signals in the second round the buyers bid in a second price auction where the winner pays the sum of his premium and the second highest non negative bid in the case of a single buyer this mechanism simplifies to a menu of european call options