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Overoptimism and Lender Liability in the Consumer Credit Market

Author

Listed:
  • Elisabetta Iossa

    (Brunel University)

  • Giuliana Palumbo

    (Bank of Italy)

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 selle rmisrepresentation - 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.

Suggested Citation

  • Elisabetta Iossa & Giuliana Palumbo, 2006. "Overoptimism and Lender Liability in the Consumer Credit Market," Temi di discussione (Economic working papers) 598, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_598_06
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    References listed on IDEAS

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    2. Rohan Pitchford, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Reply," American Economic Review, American Economic Association, vol. 91(3), pages 739-745, June.
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    6. Michael Spence, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 561-572.
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    9. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-1141, December.
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    11. Elisabetta Iossa & Giuliana Palumbo, 2004. "Product quality, lender liability, and consumer credit," Oxford Economic Papers, Oxford University Press, vol. 56(2), pages 331-343, April.
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    Cited by:

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    3. 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, vol. 32(1), pages 218-238, March.
    4. Francesco Angelini & Massimiliano Castellani & Lorenzo Zirulia, 2022. "Overconfidence in the art market: a bargaining pricing model with asymmetric disinformation," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(3), pages 961-988, October.

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    More about this item

    Keywords

    consumer credit; lender liability; misrepresentation; overoptimism; product failure;
    All these keywords.

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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