The Role of Leasing under Adverse Selection
AbstractLeasing contracts are extensively used in durable goods markets. These contracts specify a rental rate and an option price at which the used good can be bought on termination of the lease. This option price cannot be controlled when the car is sold. We show that in a world in which quality is observable, this additional control variable is ineffective. Under adverse selection instead, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. Consistent with the data, our model predicts that leased cars have a higher turnover and that off-lease used cars are of higher quality. Moreover, the model predicts that the recent increase in leasing can be explained by the observed increase in car durability. We show that leasing contracts can improve welfare but that they are imperfect tools. We also show that a producer with market power can benefit from leasing contracts for two reasons: market segmentation and better pricing of the option. Moreover, despite the fact that lessors could structure contracts to prevent adverse selection, we show that this is not in their interest.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Political Economy.
Volume (Year): 110 (2002)
Issue (Month): 1 (February)
Contact details of provider:
Web page: http://www.journals.uchicago.edu/JPE/
Other versions of this item:
- Igal Hendel & Alessandro Lizzeri, 1998. "The Role of Leasing under Adverse Selection," NBER Working Papers 6577, National Bureau of Economic Research, Inc.
- I. Hendel & A. Lizzeri, 1999. "The Role of Leasing under Adverse Selection," Princeton Economic Theory Papers 99f7, Economics Department, Princeton University.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
- Laffont, Jean-Jacques & Tirole, Jean, 1994.
"Pollution Permits and Compliance Strategies,"
IDEI Working Papers
39, Institut d'Économie Industrielle (IDEI), Toulouse.
- McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
- Bond, Eric W. & Samuelson, Larry, 1987. "The Coase conjecture need not hold for durable good monopolies with depreciation," Economics Letters, Elsevier, vol. 24(1), pages 93-97.
- 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.
- Steven A. Sharpe & Hien H. Nguyen, 1994.
"Capital market imperfections and the incentive to lease,"
Finance and Economics Discussion Series
94-5, Board of Governors of the Federal Reserve System (U.S.).
- Sharpe, Steven A. & Nguyen, Hien H., 1995. "Capital market imperfections and the incentive to lease," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 271-294.
- Igal Hendel & Alessandro Lizzeri, 1997.
"Adverse Selection in Durable Goods Markets,"
NBER Working Papers
6194, National Bureau of Economic Research, Inc.
- Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 61-92, April.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
- Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November.
- Grenadier, Steven R., 1996. "Leasing and credit risk," Journal of Financial Economics, Elsevier, vol. 42(3), pages 333-364, November.
- Smith, Clifford W, Jr & Wakeman, L MacDonald, 1985. " Determinants of Corporate Leasing Policy," Journal of Finance, American Finance Association, vol. 40(3), pages 895-908, July.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statistics
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.