Reputation, Product Quality, and Warranties

Nabil Ibraheem Al‐Najjar*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

Abstract

This paper studies the firm's choice between implicit and explicit contracts as alternative methods of assuring product quality. The relationship between these two contractual forms is studied using a dynamic model with imperfect monitoring and team moral hazard where both the firm and the consumer take unobservable actions that affect product performance. The firm chooses the contractual arrangement that maximizes expected profit. Identified are conditions on the primitive attributes of the transactions and on the firm's environment that can help explain why firms might decide to use explicit contracting, implicit contracting, or a combination of the two. I also show that there are conditions under which the introduction of reputation causes explicit contracts to be more uniform and less sensitive to the details of the transaction than implied by static models.

Original languageEnglish (US)
Pages (from-to)605-637
Number of pages33
JournalJournal of Economics & Management Strategy
Volume3
Issue number4
DOIs
StatePublished - Jan 1 1994

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Strategy and Management
  • Management of Technology and Innovation

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