Working Paper No. 01-20:
The Harmonization of Legal Warranties in European Sales Law: An Economic Analysis

Author(s):

Francesco Parisi

Date Posted: 2001

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Abstract:

EC Directive 1999/44 represents a sizeable step towards the harmonization of European law of warranties in consumer sales. In this article, I consider the goal of harmonization of European sales and warranties law from an economic perspective and subsequently examine some of the main provisions of the Directive in light of current economic theories of consumer protection. I begin with an analysis of conventional and legal warranties, which the law and economics literature considers as promises of the seller to assume specific responsibilities in case the quality or the performance of the purchased item does not conform to the specifications and contractual expectations of the buyer. From an economic point of view, there are three main functions of conventional and legal warranties: (a) insurance; (b) signaling; and (c) incentive functions. In such context, the choice of optimal level and duration of a warranty depends on (a) the risk propensities of the parties; (b) the informational asymmetries between the parties; and (c) the determinants of the probability of a product's lack of conformity or breakdown. The analysis reveals that different optimal levels of warranty may be chosen in real life cases to create the optimal balance of risk allocation and parties' incentives. I consider the results of the economic model in the various scenarios and evaluate the consistency of the unified solution adopted by the European Directive.