Money-Back Contracts with Double Moral Hazard

Abstract

We analyze money-back contracts, in which a seller promises to refund some fraction of the buyer's purchase price if an item is returned, as a three-stage game. In a cooperative first stage the players determine a price and refund share. In the second stage they noncooperatively choose inputs. The buyer decides whether to return the item in the final stage. This process economizes on the information necessary to enforce a contract and serves an incentive function when transactions involve double moral hazard. Efficient contracts exist when uncertainty is moderate. Inefficiencies result when there is either insufficient or excessive uncertainty.