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The Market for Used Cars: A New Test of the Lemons Model

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  • Emons, Winand
  • Sheldon, George

Abstract

The lemons model assumes that owners of used cars have an informational advantage over potential buyers with respect to the quality of their vehicles. Owners of bad cars will try to sell them to unsuspecting buyers while owners of good cars will hold on to theirs. Consequently, the quality of traded automobiles should be sub-average. In contrast to previous work, the following Paper tests both the assumption of informational asymmetry and the prediction of sub-average traded car quality using a sample consisting of all 1985 cars registered in the Swiss canton of Basle-City over the period 1985-91. Our data support both the assumption and the prediction of the lemons model. The lemons problem does not appear to be widespread, however.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3360.

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Date of creation: May 2002
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Handle: RePEc:cpr:ceprdp:3360

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Keywords: adverse selection; duration models; used car market;

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Cited by:
  1. Peter Kooreman & Marco Haan, 2006. "Price Anomalies in the Used Car Market," De Economist, Springer, vol. 154(1), pages 41-62, 03.
  2. Sylvain Prado, 2010. "A Family Hitch : Econometrics of the New and the Used Car Markets," EconomiX Working Papers 2010-4, University of Paris West - Nanterre la Défense, EconomiX.
  3. Christopher Adams & Laura Hosken & Peter Newberry, 2011. "Vettes and lemons on eBay," Quantitative Marketing and Economics, Springer, vol. 9(2), pages 109-127, June.

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