Warranty

economic-dictionary

A guarantee is a mechanism to ensure compliance with an obligation and thus protect the rights of any of the parties to a commercial or legal relationship.

In other words, a guarantee is a contract or enforceable commitment by which one of the parties to a transaction undertakes that, in the event that the agreement is not fulfilled or some inconvenience arises, the rights of the affected party will be protected, trying to reduce to the maximum any harm.

What is the warranty for

The guarantee is a means to provide greater security in cases where there is a significant risk that a condition is not met or a problem appears. Without the guarantees, many transactions would not be carried out or would be very expensive since one of the parties would have to assume a significant risk of suffering an economic loss.

Guarantees play a very important role in the economy since they facilitate transactions. This, giving greater security to people that the agreement will be fulfilled.

Warranty usage example

When there are market failures, such as information asymmetry, guarantees are a key element for the market to function. Without guarantees, the market could be very limited or simply not exist.

Let's look at an example: In the case of used cars, there is an information asymmetry problem because the buyer does not have the ability to assess the quality of the car without having previously used it. While the seller may have more information, but not enough incentive to disclose it.

Probably in this case, if there are no guarantees, high quality cars would end up leaving the market since the maximum price that an uninformed consumer would be willing to offer would be low because they face the risk of buying a poor quality car. This creates a problem of inefficiency since there are buyers interested in quality used cars and also suppliers of quality cars interested in selling, but these transactions would not take place.

In this case, the guarantee can serve as a differentiator. Thus, owners of quality cars can offer an extended quality guarantee, while owners of low-quality cars cannot. In this way, the consumer gets more information while ensuring backup in case the car malfunctions.

Types of guarantees

There are different types of guarantee according to the right that is being protected. Here are some of the more popular warranties:

  • Purchase: It assures the buyer that, if the product they bought suffers any damage, the manufacturer will be responsible for repairing it or changing it for a new one. The most common characteristics of this type of guarantee are:
    • They are limited to a certain period of time (1 year for example)
    • They only cover factory defects and not misuse or accidents caused by the buyer
    • Proof of purchase or warranty documentation that was provided at the time of purchase must be presented
  • Personal: A third person agrees to take responsibility in case of non-compliance. This type of guarantee is usually applied in credits where a third party, the guarantor, will pay the debt if the person who has requested the loan does not comply.
  • Real: Refers to cases where an asset is left as a guarantee of payment. Thus, for example, in the case of a mortgage, the debtor leaves his house as a guarantee of compliance with the agreement.
  • Financial: These are cases where a financial instrument or cash is used as collateral.
  • Constitutional: When what is guaranteed are the constitutional rights of a person. Thus, for example, if an individual is investigated for an alleged robbery or crime, the State must guarantee that due process will be carried out and that the rights of the investigated will be respected.
  • Legal: When the guarantee is established by law.
  • Conventional: in cases in which the guarantee is freely agreed by the parties to a relationship.

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