Gaining Assurances01 Jan 2012
This Article explores alternative legal mechanisms for solving a type of coordination problem known as the Assurance Game. The traditional approach has been to focus on changing the expectations of the parties. This Article focuses on altering the underlying payoff structure — not through sanctions, but through risk-reducing mechanisms such as guarantees.
One type of risk-reducing mechanism is the conditional money-back guarantee. Conditional money-back guarantees operate in settings ranging from federal deposit insurance to daily deal websites such as Groupon and LivingSocial. In each of these, a promise is made to return an individual’s monetary contribution if an event or condition that depends on the actions of others is met. The condition may be (1) the reaching of a predetermined threshold, or (2) the happening of some event. This Article examines both types of conditional money-back guarantees and analyzes factors that may impact their effectiveness.