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Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds Under Asymmetric Information

  • Logic


Refunds are modelled as a market response to asymmetric information. A firm's choice of product reliability is private information, and not verifiable. Firms compete by offering price-refund contracts; consumers draw inferences about quality from the observed contracts. In equilibrium, quality is revealed by the contracts, prices, refunds and (unobserved) quality are predicted to be positively correlated with income when consumers care about quality. The paper then discusses "new and improved" products when consumers cannot observe technology. Without additional sources of information, product quality may be too high in equilibrium.

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