Florian Baumann, Tim Friehe and Tobias Wenzel

This paper shows that providing consumer rights can decrease welfare when some consumers misperceive these rights. We offer a framework in which consumers uninformed about their mandated warranty may demand inefficiently safe products in equilibrium. Without the inefficiency, that is, if uninformed consumers buy the same (and efficient) product variety as informed consumers, the former group of consumers cross-subsidizes the latter via the firms’ pricing. Our paper highlights undesirable repercussions from mandating rights that consumers may misperceive. With respect to the policy option of providing consumer-rights information, we find that increasing the share of informed consumers may lessen or aggravate the risk of inefficiency and that this depends on market power.

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