Abstract
Although government regulations on product warranties are common, few studies have empirically examined their effects on product demand. Using a natural experiment, we examine the effect of a newly introduced government warranty regulation in China’s automobile market on product demand. Exploiting the exogenous variation in warranty coverage caused by the regulation, we apply a difference-in-differences analysis and find that the regulation increases the sales of the affected vehicles. Moreover, we find that (1) the demand effects of the regulation decrease as vehicle quality increases, and that (2) these effects are weaker for luxury brand vehicles and stronger for non-luxury vehicles.
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