PROCUREMENT PROBLEMS AND WARRANTY PERIOD FOR PRODUCT FAILURE

Abstract

 This study proposes a theoretical model for procuring materials with an incentive compatible quality level, price, and warranty period, which tackles the adverse selection and moral hazard problems. We have compared various warranty periods of materials having different failure characteristics defined by the Weibull distribution. The paper has concluded that a purchaser can procure the material without adverse selection or moral hazard, if the purchaser contracts an optimal warranty period with their supplier. However, the purchaser’s payoff depends on their capability of identifying quality levels.