Francesco Parisi (University of Minnesota – Law School; University of Bologna) and Ben Depoorter (UC Law, San Francisco; Stanford Law School Center for Internet & Society; Ugent – CASLE) have posted Extended Warranties as a Regressive Cross-Subsidy on SSRN. Here is the abstract:
This paper examines optional product insurance—such as extended warranties, device protection plans, and embedded service contracts—as a regressive cross-subsidy. Standard accounts treat these add-ons as optional risk-transfer contracts. We argue that they also perform a price-structuring function. When demand for optional insurance declines with income, firms can recover part of the product price through higher insurance premiums paid by lower-income consumers. Higher-income consumers are more likely to opt out and self-insure, benefiting from lower product prices without bearing the insurance margin. Optional insurance can therefore raise the effective price paid by lower-income consumers while lowering the base price paid by higher-income uninsured consumers. The paper explores the effects of this mechanism within a law-and-economics framework that connects risk allocation, price discrimination, and distributional effects. It distinguishes the cross-subsidy effects from adverse selection. Under adverse selection, premiums rise because the insured pool becomes riskier. Under the cross-subsidy account, premiums may rise even when the risk pool remains stable, because firms can extract higher premiums from consumers with greater willingness to pay for coverage. The distinction matters for policy. Adverse selection points toward information remedies and risk classification; cross-subsidization points toward closer scrutiny of multi-part pricing and the possible role of mandatory baseline coverage. The analysis thus offers a distributional rationale for mandatory legal warranties, such as EU-style consumer protection mandates, as a way to limit regressive transfers made possible by optional insurance markets.
Highly Recommended!
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