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Leasing, Lemons, and Moral Hazard

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  • Justin P. Johnson
  • Michael Waldman

Abstract

A number of recent papers have analyzed leasing in the new-car market as a response to the adverse-selection problem in the used-car market originally explored in the seminal 1970 paper by George Akerlof. In this paper we consider a model characterized by both adverse selection, as in these earlier papers, and moral hazard concerning the maintenance choices of new-car drivers. We show that this approach provides explanations for a number of empirical findings concerning real-world new- and used-car markets, including that leasing has become more popular over time, very high income new-car drivers lease more, and used cars that were leased when new sell for more than used cars that were purchased when new. We also compare and contrast our approach to new-car leasing with alternative approaches. (c) 2010 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 53 (2010)
Issue (Month): 2 (05)
Pages: 307-328

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Handle: RePEc:ucp:jlawec:v:53:y:2010:i:2:p:307-328

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Chemmanur, Thomas & Jiao, Yawen & Yan, An, 2010. "A theory of contractual provisions in leasing," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 116-142, January.
  2. Igal Hendel & Alessandro Lizzeri & Marciano Siniscalchi, 2000. "Efficient Sorting in a Dynamic Adverse Selection Model: The Hot Potato," Econometric Society World Congress 2000 Contributed Papers 1209, Econometric Society.
  3. Andrea L. Eisfeldt & Adriano A. Rampini, 2009. "Leasing, Ability to Repossess, and Debt Capacity," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1621-1657, April.
  4. Maarten C. W. Janssen & Vladimir A. Karamychev, 2002. "Cycles and multiple equilibria in the market for durable lemons," Economic Theory, Springer, vol. 20(3), pages 579-601.
  5. Hartmann-Wendels, Thomas, 2004. "Die Bedeutung des Leasings für die Unternehmensfinanzierung: Theoretische Perspektiven und empirische Ergebnisse," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 2(2), pages 7-40.
  6. Bård Harstad, 2011. "The Market for Conservation and Other Hostages," NBER Working Papers 17409, National Bureau of Economic Research, Inc.
  7. Ennio Bilancini & Leonardo Boncinelli, 2014. "Dynamic Adverse Selection and the Supply Size," Center for Economic Research (RECent) 099, University of Modena and Reggio E., Dept. of Economics.
  8. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo Group Munich.
  9. Maarten C.W. Janssen & Vladimir Karamychev, 2000. "Continuous Time Trading in Markets with Adverse Selection," Tinbergen Institute Discussion Papers 00-109/1, Tinbergen Institute.

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