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Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting

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  • Jonathan R. Peterson

    (Graduate School of Business, Nazarbayev University, Astana 020000, Kazakhstan; and Department of Economics and Finance, Louisiana Tech University, Ruston, Louisiana 71272)

  • Henry S. Schneider

    (Smith School of Business, Queen’s University, Kingston, Ontario K7L 3N6, Canada)

Abstract

We document a basic characteristic of adverse selection in secondhand markets for durable goods: goods with higher observed quality may have more adverse selection and hence lower unobserved quality. We provide a simple theoretical model to demonstrate this result, which is a consequence of the interaction of sorting between drivers over observed quality and adverse selection over unobserved quality. We then offer empirical support using data on secondhand prices and repair rates of used cars from the Consumer Expenditure Survey, and discuss a number of implications for everyday advertising and consumer questions.

Suggested Citation

  • Jonathan R. Peterson & Henry S. Schneider, 2017. "Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting," Management Science, INFORMS, vol. 63(9), pages 3111-3127, September.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:9:p:3111-3127
    DOI: 10.1287/mnsc.2016.2495
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    References listed on IDEAS

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    Cited by:

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    2. Inge van den Bijgaart & Davide Cerruti, 2020. "The effect of information on market activity; evidence from vehicle recalls," CER-ETH Economics working paper series 20/343, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    3. Jonathan R. Peterson, 2023. "Employee bonding and turnover efficiency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(1), pages 223-244, January.

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