An undesirable feature of Akerlof style models of adverse selection is that ownership of" used cars is independent of preferences and is therefore ad hoc. We present a dynamic model" that incorporates the market for new goods. Consumers self-select into buying new or used" goods making ownership of used goods endogenous. We show that, in contrast with Akerlof and" in agreement with reality, the used market never shuts down and that the volume of trade can be" quite substantial even in cases with severe informational asymmetries. By incorporating the" market for new goods, the model lends itself to a study of the effects of adverse selection on" manufacturers' incentives. We find that manufacturers may gain from adverse selection. We" also give an example in which the market allocation under adverse selection is socially optimal. " An extension of the model to a world with many brands that differ in reliability leads to testable" predictions of the effects of adverse selection. We show that unreliable car brands have steeper" price declines and lower volumes of trade.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6194.
Length: Date of creation: Sep 1997 Date of revision: Handle: RePEc:nbr:nberwo:6194
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Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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