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Efficient Sorting in a Dynamic Adverse Selection Model: The Hot Potato

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  • Igal Hendel

    (Princeton University)

  • Alessandro Lizzeri

    (Princeton University)

  • Marciano Siniscalchi

    (Princeton University)

Abstract

We study the possibility of achieving efficiency in a dynamic adverse selection market for durable goods. The idea is to use the number of times a car has been traded (``vintage'') as a signal of its quality. Higher-valuation consumers experiment with younger vintages. We first exhibit an impossibility result: no choice of (re)sale prices can induce consumers to follow this experimentation policy. We then show that modified leasing contracts can be constructed so as to achieve efficiency if consumers are patient.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1209.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1209

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  1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
  2. Justin P. Johnson & Michael Waldman, 2010. "Leasing, Lemons, and Moral Hazard," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 53(2), pages 307-328, 05.
  3. Maarten C. W. Janssen & Santanu Roy, 2002. "Dynamic Trading in a Durable Good Market with Asymmetric Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 257-282, February.
  4. I. Hendel & A. Lizzeri, 1999. "The Role of Leasing under Adverse Selection," Princeton Economic Theory Papers, Economics Department, Princeton University 99f7, Economics Department, Princeton University.
  5. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  6. Igal Hendel & Alessandro Lizzeri, 1997. "Adverse Selection in Durable Goods Markets," NBER Working Papers 6194, National Bureau of Economic Research, Inc.
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