Over-Optimism and Lender Liability in the Consumer Credit Market
Posted: 29 Mar 2010
Date Written: April 2010
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: Suggested Citation