A justification for caveat emptor in the secondhand market: Risk transfer, enforcement cost and insurance

Hiroyuki Seshimo

Economic Analysis and Policy, 2020, vol. 66, issue C, 217-235

Abstract: Caveat emptor (”let the buyer beware”) is the prevailing legal doctrine in sales transactions, especially in secondhand markets such as the residential housing market. In this paper, I provide one of the theoretical justifications for this legal doctrine. I mainly examine the doctrines of caveat venditor (”let the seller beware”) and caveat emptor and consider which doctrine better mitigates the adverse selection problem. I consider the secondhand market with risk-averse sellers and buyers; in this context, the risk transfer function plays an important role. Then, I reveal that caveat emptor outperforms caveat venditor, at least unless the legal enforcement cost is free.

Keywords: Caveat emptor (“let the buyer beware”); Caveat venditor (“let the seller beware”); Adverse selection; Warranty; Insurance contract; Risk transfer (search for similar items in EconPapers)
JEL-codes: K13 K4 P48 R31 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:66:y:2020:i:c:p:217-235

DOI: 10.1016/j.eap.2020.04.005

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