Consumer perception of warranty as signal of quality: An empirical study of powertrain warranties

This paper empirically explores the degree to which consumers perceive a manufacturer’s warranty as a signal of unobservable product quality. Data on household purchases of new automobiles from the Consumer Expenditure Survey are used to estimate both conditional and mixed logit models of consumer demand, with the indirect utility specification extended to incorporate the impact of manufacturer provided powertrain warranties. To distinguish between two main motives underlying consumer preference for warranties, signaling and risk aversion, the impact of warranty length is allowed to differ by proxies for [1] household risk aversion and [2] amount of product information available to the household. Our results suggest, at most, a modest role for risk aversion but an important one for signaling. We find warranty length especially appealing for brands that consumers have not previously experienced and for recently introduced makes not yet rated in Consumer Reports – precisely the type of automobiles for which asymmetric information is the greatest and signals of product quality the most valuable.