Product Durability and Moral Hazard

Abstract

Previous durability studies conclude that a monopolist that sells output without any commitment ability will tend to produce output with lower durability than a monopolist that rents output. This paper demonstrates that this conclusion depends critically on the degree of moral hazard (possible damage to output) faced by renting firms. When moral hazard abuse or neglect is introduced in a durability model it is shown that a renter may manufacture output with lower durability than an uncommitted seller reversing the conventional obsolescence result. However, the analysis indicates that, unlike the seller's commitment problem, the presence of moral hazard in rental markets does not cause a failure of the independence of durability and industry structure.