Winand Emons

Credence goods monopolists

With a credence good, consumers are never sure about the extent of the good that they actually need. Experts such as doctors and lawyers, as well as auto mechanics and appliance service-persons (the sellers) not only provide the services, but also act as the expert in determining the customers requirements. This information asymmetry between buyers and the seller creates strong incentives for the seller to cheat. We analyze whether the market mechanism may induce non-fraudulent seller behavior.

Warranties, moral hazard, and the lemons problem

Abstract This paper analyzes the following problem. Consumers cannot observe product quality at the time of purchase so that only warranties can induce firms to supply high-quality products. Yet, if consumers can adjust the care with which they use products, the presence of warranties may result in more frequent product failure. The paper studies what kinds of contracts will be offered in a competitive market characterized by such a double-sided moral hazard problem.

Expertise, contingent fees, and insufficient attorney effort

Plaintiffs have either developed or less developed cases. Both cases should be taken to court, yet less developed cases need more work by the attorney than developed cases. Only the attorney knows whether a case needs additional work or not; the plaintiff is forced to rely on the attorney’s recommendation. We show that under contingent fees attorneys may provide insufficient effort, i.e., they will not work hard on the less developed cases. In contrast, an hourly fee always induces attorneys to take efficient effort.

On the Effectiveness of Liability Rules when Agents are not Identical

This paper is about accidents involving two risk-neutral parties. Both parties engage in actions that are profitable but affect the magnitude of possible bilateral accidents. We analyse how the action choices can be decentralized by liability rules that assign the accident costs to the two parties. If we allow for punitive damages, we can implement the first-best actions by a liability rule even if agents are not identical. Under this liability rule some individuals may be in expectation better off in the event of an accident than in the event of no accident. We provide conditions under which this problem does not arise.

On the Limitation of Warranty Duration

This paper analyzes the frequently-observed phenomenon that firms offer product warranties that are of much shorter duration than the life expectancy of these products. It is shown that competitive equilibria may entail limitation of warranty duration if firms face adverse selection problems with respect to different consumers. Copyright 1989 by Blackwell Publishing Ltd.

Efficient liability rules for an economy with non-identical individuals

Abstract This paper is about accident situations involving two risk-neutral parties. Both parties engage in activities that are profitable but affect the magnitude of possible bilateral accidents. We analyse how the activity choices can be decentralized by liability rules that assign the costs to the two parties to an accident. We show that rules which share damages are superior to rules where one party bears the entire accident costs.

Subgame Perfect Punishment for Repeat Offenders

First we show that for wealth-constrained agents who may commit an act twice the optimal sanctions are the offenders entire wealth for the first and zero for the second crime. Then we ask the question whether this decreasing sanction scheme is subgame perfect (time consistent), i.e., does a rent-seeking government stick to this sanction scheme after the first crime has occurred. If the benefit and/or the harm from the crime are not too large, this is indeed the case; otherwise, equal sanctions for both crimes are optimal.

Good Times, Bad Times, and Vertical Upstream Integration

Abstract We consider a set of downstream firms each of which has a stochastic requirement for a particular input. Downstream firms can produce the input themselves yet do not trade it. Upstream firms produce the input to sell it through a Walrasian market to downstream firms. Efficient pooling of capacities requires the input to be produced by upstream firms and traded in the market. Yet, downstream firms will always vertically integrate. By producing some of its own input needs, a downstream firm cuts down on aggregate input demand thus depressing prices in the market.

The Market for Used Cars: New Evidence of the Lemons Phenomenon

The lemons model assumes that owners of used cars have an information advantage over potential buyers with respect to the quality of their vehicles. Owners of bad cars try to sell them to ill-informed buyers while owners of good cars hold on to theirs. Consequently, the quality of traded automobiles tends to be sub-average. In contrast to previous empirical work, the following article investigates the behaviour of both buyers and sellers, testing for adverse selection by sellers and for quality uncertainty among buyers with a sample consisting of all 1985 cars registered in the Swiss canton of Basle City over the period 1985 to 1991. Our data supports both adverse selection and buyer uncertainty, suggesting that a lemons problem exists.

The Economics of US-Style Contingent Fees and UK-Style Conditional Fees

Under contingent fees the attorney gets a share of the judgement; under conditional fees the lawyer gets an upscale premium if the case is won which is, however, unrelated to the adjudicated amount. We compare conditional and contingent fees in a principal-agent framework where the lawyer chooses unobservable effort after they have observed the amount at stake. Contingent fees provide better incentives than conditional fees independently of whether upfront payments are restricted to be non-negative or not. Under contingent fees the attorney uses their information about what is at stake more efficiently.