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.Furthermore, caveat emptor remains superior to caveat venditor when a third-party insurance contract is available. Insurance contracts are not as effective under caveat venditor as they are under caveat emptor.
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