Comparing quality signals as tools of consumer protection: are warranties always better than advertisements to promote higher product quality?

Firms use different instruments to convey product quality in order to counteract market failures due to lack of information on behalf of consumers. We will give a brief overview on the two main types of quality signals. Then an economic model is developed to determine which offers better incentives to provide for higher production quality. The results are applied to the present legislation on warranty law and on misleading advertisement. (C) 2004 Elsevier Inc. All rights reserved.