This article proposes a new theory of the standardized warranty and of the determinants of the content of the warranties of individual products. … A warranty is viewed as a contract that optimizes the productive services of goods by allocating responsibility between a manufacturer and consumer for investments to prolong the useful life of a product and to insure against product losses. According to the theory, the terms of warranty contracts are determined solely by the relative costs to the parties of these investments. An insurance function of warranty coverage, of course, is well known. The novelty of the theory is its emphasis on the variety of allocative investments that consumers may make to extend productive capacity and its consideration of the difficulties of drafting warranty contracts to encourage such investments. …

The basic theory defined

Let us … [try] to predict the contents of warranties where the costs of extending product life and of insuring product losses are the sole determinants of their contents. Imagine that consumers are perfectly informed about the likelihood of a product defect and about the losses that will be suffered should a product become defective. Imagine also that consumers somehow make their preferences regarding warranty terms known to manufacturers and that manufacturers are responsive to those preferences. Imagine that warranty contracts are standardized only to reduce negotiation costs and thus that the standardized form itself does not affect the substantive obligations of consumers relative to manufacturers.