Overoptimism and Lender Liability in the Consumer Credit Market

38 Pages Posted: 6 Oct 2006

See all articles by Giuliana Palumbo

Giuliana Palumbo

Bank of Italy

Elisabetta Iossa

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

Date Written: September 2006

Abstract

Credit purchases of consumer goods are commonly made upon terms governed by an agreement between the lender and the seller. This type of purchase is generally subject to a legal principle of joint responsibility under which the lender and the seller are jointly liable to the consumer for breach of the sale contract by the seller. We study the rationale for this principle in situations where market failure arises because consumers under estimate 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.

Keywords: consumer credit, lender liability, misrepresentation, overoptimism, product failure

JEL Classification: D18, G28, K13

Suggested Citation

Palumbo, Giuliana and Iossa, Elisabetta, Overoptimism and Lender Liability in the Consumer Credit Market (September 2006). Bank of Italy Economic Research Paper No. 598, Available at SSRN: https://ssrn.com/abstract=935014 or http://dx.doi.org/10.2139/ssrn.935014

Giuliana Palumbo (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Elisabetta Iossa

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
115
Abstract Views
972
rank
270,809
PlumX Metrics