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Over-optimism and lender liability in the consumer credit market

  • Elisabetta Iossa
  • Giuliana Palumbo

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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File URL: http://hdl.handle.net/10.1093/oep/gpp008
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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 & Hochguertel, Stefan & Koeniger, Winfried, 2002. "Dealer Pricing of Consumer Credit," IZA Discussion Papers 440, Institute for the Study of Labor (IZA).
  2. 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, vol. 91(3), pages 731-738, June.
  3. Boyer, M. & Kihlstrom, R.E. & Laffont, J.J., 1980. "Market Determinants of Misleading Advertising," Cahiers de recherche 8036, Universite de Montreal, Departement de sciences economiques.
  4. A. Mitchell Polinsky & William P. Rogerson, 1982. "Products Liability, Consumer Misperceptions, and Market Power," NBER Working Papers 0937, National Bureau of Economic Research, Inc.
  5. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
  6. Boyer, M. & Laffont, J.J., 1995. "Environmental Risks and Bank Liability," Cahiers de recherche 9501, Universite de Montreal, Departement de sciences economiques.
  7. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
  8. 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, vol. 91(3), pages 724-730, June.
  9. 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.
  10. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-86, December.
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