Abstract
Many disputes between buyers and sellers concern product quality and whether a claim of poor product performance is covered by a warranty issued by the seller. We develop and analytical framework in which average product quality, buyer preferences, production and transaction costs, and the extent to which true quality can be observed by buyer and seller interact to determine warranties, product price, and the likelihood of disputes. Using this framework, we examine the impact of various types of dispute resolution mechanisms (DRM's) on these outcomes. We relate features of DRM's, such as cost and accuracy, to prices, warranties, and allocative efficiency of the market in which disputes arise.
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