Quantifying the Economic Value of Warranties: A Survey

Abstract

This paper is a review of the most recent literature regarding the econometric modelling of the impact of warranties on demand. The reviewed literature is limited to the papers that apply the random-coefficient logit model based on Berry, Levinsohn and Pakes (1995) to estimate differentiated products demand. An important feature of these demand system models that is a clear advantage to earlier demand functions is to account for the endogeneity of prices. We focus on those model specifications that take into account endogeneity of both prices and warranty. Another goal for modelling the effect of warranties is to explore the economic rationale for warranty provision. Four theories have been proposed in the literature: insurance, sorting, signalling and incentive theories. This paper aims at decomposing the effect of these theories, to account for different underlying assumptions and to separately determine the implications as presented in the recent literature