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Oxford Economic Papers Advance Access published online on April 13, 2009
Oxford Economic Papers, doi:10.1093/oep/gpp008
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© Oxford University Press 2009 All rights reserved

Over-optimism and lender liability in the consumer credit market

Elisabetta Iossa* and Giuliana Palumbo{dagger}

*Department of Economics and Finance, Brunel University, Uxbridge, UB8 3PH; and University of Rome Tor Vergata, CEDI and CMPO; e-mail: Elisabetta.Iossa{at}brunel.ac.uk
{dagger}Research Department, Bank of Italy; e-mail: giuliana.palumbo{at}bancaditalia.it.

JEL classifications: D18, G28, K13


  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.


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