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This paper analyzes the effects of different sequences of remedies on the incentives of sellers to invest in product quality and on the probability of contract termination. For most European jurisdictions, Directive 1999/44/EC on the sale of consumer goods and its subsequent implementation into national law resulted in a substantial change in the remedies available to the consumer if a product proves deficient. Despite the purpose of the directive to harmonize national legislation, sales laws still differ significantly among member states. The analysis uses a stylized model to compare the pertinent features of two prototypical legal regimes that can be found after the directive’s implementation. The pivotal difference between the respective regimes lies in the sequence of remedies. We show that it is possible that investment incentives and the probability that contractual relationships initiated will be completed may be larger under either legal regime. Despite the general case’s ambiguity, we establish that the cancelation probability is typically lower if sales law limits buyers initial choice of remedies to subsequent performance. Our analysis indicates that the EC’s harmonization target has been missed. With regard to social optimality, we detail under which conditions it is desirable to provide an institutional framework that allows total seller investment to be split between an initial and an incremental input.
