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

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  • Seshimo, Hiroyuki

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.

Suggested Citation

  • Seshimo, Hiroyuki, 2020. "A justification for caveat emptor in the secondhand market: Risk transfer, enforcement cost and insurance," Economic Analysis and Policy, Elsevier, vol. 66(C), pages 217-235.
    • Handle: RePEc:eee:ecanpo:v:66:y:2020:i:c:p:217-235
    DOI: 10.1016/j.eap.2020.04.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Caveat emptor (“let the buyer beware”); Caveat venditor (“let the seller beware”); Adverse selection; Warranty; Insurance contract; Risk transfer;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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