Signaling Quality with Return Insurance: Theory and Empirical Evidence

This paper examines an innovative return policy, insurance, emerging on various shopping platforms such as Taobao.com and JD.com. Return insurance is underwritten by insurer can be purchased either a retailer or consumer. Under the partially compensates consumers for their hassle costs associated with product return. We analyze informational roles of when quality retailer’s private information, infer from price adoption, strategically chooses premiums. show that effective signal high quality. When have little confidence about expect significant gap between low qualities, high-quality differentiated low-quality solely through its adoption insurance. confirm, both analytically empirically data set consisting more than 10,000 sellers JD.com, likely adopted higher-quality under information asymmetry. Furthermore, we find presence third party (i.e., insurer) leads to double marginalization in signaling, which strengthens signal’s differentiating power sometimes renders preferred signal, comparison free return, whereby retailers directly compensate consumers’ hassles. As costly quality, may also improve consumer surplus reduce returns. Its profit advantage most pronounced uncertainty. was accepted Vishal Gaur, operations management.