Product quality, lender liability, and consumer credit

Under ‘linked credit’ (also known as ‘connected lending’), the buyer obtains a loan from a lender with the specific purpose of purchasing a certain product. Credit is arranged directly by the seller, who acts as an intermediary for the finance company. Within this form of financing, the lender often accepts a measure of liability for defective products. We show that ‘connected-lender liability’ can work as a signalling device for the reliability of sellers, so as to alleviate the market failure that arises when sellers are better informed than consumers about the quality of their products.