Satisfaction guaranteed: When moral Hazard Meets moral preferences

Abstract

The fear of moral hazard-especially in the age of internet commerce- can depress or prevent profitable trades. Experiments show, however, that many people prefer honesty to deceit and would not succumb to moral hazard. This paper asks whether we can find a simple, voluntary institution that can empower moral traders, drive out amoral ones, reduce moral hazard, and restore profitable trade to markets. I find that selling goods with a "satisfaction guarantee," accompanied by potentially minor legal or reputational enforcement, allows moral preferences to defeat moral hazard.