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Adverse Selection in Durable Goods Markets

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  • Alessandro Lizzeri
  • Igal Hendel

Abstract

We present a dynamic model of adverse selection to examine the interactions between new and used goods markets. We find that the used market never shuts down, the volume of trade can be large, and distortions are lower than previously thought. New cars prices can be higher under adverse selection than in its absence. An extension to several brands that differ in reliability leads to testable predictions of the effects of adverse selection. Unreliable brands have steeper price declines and lower volumes of trade. We contrast these predictions with those of a model where brands physically depreciate at different rates.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.89.5.1097
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 89 (1999)
Issue (Month): 5 (December)
Pages: 1097-1115

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Handle: RePEc:aea:aecrev:v:89:y:1999:i:5:p:1097-1115

Note: DOI: 10.1257/aer.89.5.1097
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  1. Kim, Jae-Cheol, 1985. "The Market for "Lemons" Reconsidered: A Model of the Used Car Market with Asymmetric Information," American Economic Review, American Economic Association, vol. 75(4), pages 836-43, September.
  2. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
  3. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-65, August.
  4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  5. ANDERSON, Simon P. & GINSBURGH, Victor A., . "Price discrimination via second-hand markets," CORE Discussion Papers RP -1078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  7. Bigelow, John P., 1990. "Efficiency and adverse selection," Journal of Economic Theory, Elsevier, vol. 52(2), pages 380-405, December.
  8. Bond, Eric W, 1982. "A Direct Test of the "Lemons" Model: The Market for Used Pickup Trucks," American Economic Review, American Economic Association, vol. 72(4), pages 836-40, September.
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