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Over-optimism and lender liability in the consumer credit market

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  • Elisabetta Iossa
  • Giuliana Palumbo

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. Copyright 2010 , Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 62 (2010)
Issue (Month): 2 (April)
Pages: 374-394

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Handle: RePEc:oup:oxecpp:v:62:y:2010:i:2:p:374-394

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  1. Bertola, Giuseppe & Stefan Hochguertel & Winfried Koeniger (YE), 2002. "Dealer Pricing of Consumer Credit," Royal Economic Society Annual Conference 2002, Royal Economic Society 24, Royal Economic Society.
  2. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, Elsevier, vol. 41(8), pages 1427-1459, August.
  3. Dieter Balkenborg, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 731-738, June.
  4. Tracy R. Lewis & David E. M. Sappington, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 724-730, June.
  5. Boyer, M. & Kihlstrom, R.E. & Laffont, J.J., 1980. "Market Determinants of Misleading Advertising," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 8036, Universite de Montreal, Departement de sciences economiques.
  6. A. Mitchell Polinsky & William P. Rogerson, 1983. "Products Liability, Consumer Misperceptions, and Market Power," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 581-589, Autumn.
  7. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, American Finance Association, vol. 43(5), pages 1127-41, December.
  8. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1171-86, December.
  9. Elisabetta Iossa & Giuliana Palumbo, 2004. "Product quality, lender liability, and consumer credit," Oxford Economic Papers, Oxford University Press, Oxford University Press, vol. 56(2), pages 331-343, April.
  10. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 561-72, October.
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Cited by:
  1. Bontempi, Maria Elena & Golinelli, Roberto & Parigi, Giuseppe, 2010. "Why demand uncertainty curbs investment: Evidence from a panel of Italian manufacturing firms," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(1), pages 218-238, March.

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