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Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests

Wilde, Louis L. and Schwartz, Alan (1983) Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security Interests. Social Science Working Paper, 480. California Institute of Technology , Pasadena, CA. (Unpublished)

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The existence of imperfect information is thought to provide firms with incentives to degrade contract quality by supplying terms that well-informed consumers would refuse. We show, in contrast, that these incentives are weaker than is commonly supposed; rather, when consumers gather relatively little information, the profit maximizing strategy for firms is likely to involve offering the contract terms that consumers prefer, but at supracompetitive prices. In consequence, a standard state response to imperfect information problems, regulating the substantive terms of transactions, is often misplaced. When imperfect information exists, the state instead should reduce the costs to consumers of comparison shopping for contract terms, because such shopping reduces prices and also reduces further the incentive of firms to degrade contract quality.

Item Type:Report or Paper (Working Paper)
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Additional Information:Research for this paper was supported by NSF Grant No. SES 81-17008. This paper was improved by comments made at a U. S. C. Law Center Faculty Workshop, a seminar in Contract Theory held at the Berkeley Law School and a faculty workshop at the University of Virginia. Melvin A. Eisenberg, Will T. Jones, Margaret Jane Radin, Robert E. Scott and Matthew Spitzer also made very helpful suggestions. Technical versions of the warranties model discussed in Part II B, infra, benefitted considerably from comments received at workshops held at the California Institute of Technology, the University of Chicago, Northwestern University and Stanford University. Published as Schwartz, Alan, and Louis L. Wilde. "Imperfect information in markets for contract terms: The examples of warranties and security interests." Virginia Law Review (1983): 1387-1485.
Group:Social Science Working Papers
Funding AgencyGrant Number
Subject Keywords:Consumer prices, Security interests, Imperfect information, Warranties, Contracts, Consumer preferences, Shopping, Comparative advantage, Consumer goods, Consumer economics
Series Name:Social Science Working Paper
Issue or Number:480
Record Number:CaltechAUTHORS:20170922-133259056
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81749
Deposited By: Jacquelyn Bussone
Deposited On:25 Sep 2017 23:01
Last Modified:03 Oct 2019 18:46

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