Over-Optimism and Lender Liability in the Consumer Credit Market

Posted: 29 Mar 2010

See all articles by Elisabetta Iossa

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University; Centre for Economic Policy Research (CEPR)

Giuliana Palumbo

Bank of Italy

Date Written: April 2010

Abstract

Credit purchases of consumer goods are commonly made upon terms governed by an agreement between the lender and the seller. The puzzle that the paper addresses is the issue that in this type of purchase the lender should be jointly liable with the seller for breach of sale contract by the seller (principle of joint responsibility). We study the rationale for this principle in situations where market failure arises because consumers underestimate the risk of product failure - for example due to seller misrepresentation - and it is difficult to enforce seller responsibility. We show that joint responsibility increases welfare and reduces the incentives of sellers to misrepresent the quality of their products.

JEL Classification: D18, G28, K13

Suggested Citation

Iossa, Elisabetta and Palumbo, Giuliana, Over-Optimism and Lender Liability in the Consumer Credit Market (April 2010). Oxford Economic Papers, Vol. 62, Issue 2, pp. 374-394, 2010, Available at SSRN: https://ssrn.com/abstract=1578725 or http://dx.doi.org/gpp008

Elisabetta Iossa (Contact Author)

University of Rome Tor Vergata ( email )

Via Columbia n.2
Rome, 00133
Italy

IEFE Bocconi University ( email )

Via Roentgen 1
Milan, Milan 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Giuliana Palumbo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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