WARRANTIES, DURABILITY, AND MAINTENANCE - 2-SIDED MORAL HAZARD IN A CONTINUOUS-TIME MODEL

Double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time. The more com plete the warranty, the better the producer's durability incentives an d the worse the consumer's maintenance incentives. Using continuous ti me highlights the need for some warranty bound to avoid reaching the f irst-best as an unreasonable limit. Early in the paper, an exogenous b ound is used, while later the bound arises endogenously from the possi bility of abuse and repair. A quadratic example shows that the warrant y's duration depends on the relative severity of the two moral hazard problems.