Overoptimism and Lender Liability in the Consumer Credit Market
38 Pages Posted: 6 Oct 2006
Date Written: September 2006
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: Suggested Citation