The Role of Leasing under Adverse Selection
AbstractLeasing contracts specify a rental rate and an option price at which the used good can be bought at the termination of the lease. This option price cannot be controlled when the car is sold. We show that in a world with symmetric information this additional control variable is useless; equilibrium allocations and profits to lessors are unaffected by the option prices. In contrast, under adverse selection, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. We show that a social planner can use leasing contracts to improve welfare but they are imperfect tools; they cannot generally achieve first best while other mechanisms can. We also show that a producer with market power can benefit from leasing contracts for two reasons: better pricing of the option of keeping the used good, and market segmentation. Moreover, despite the fact that lessors could structure contracts to prevent adverse selection (by raising the option price so high that no lessee keeps the used good) we show that this is not in their interest; a keeping option will always be included in some contracts.
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.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6577.
Date of creation: May 1998
Date of revision:
Publication status: published as Hendel, Igal and Alessandro Lizzeri. "The Role Of Leasing Under Adverse Selection," Journal of Political Economy, 2002, v110(1,Feb), 113-143.
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Igal Hendel & Alessandro Lizzeri, 2002. "The Role of Leasing under Adverse Selection," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(1), pages 113-143, February.
- 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.
- 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.:
- Igal Hendel & Alessandro Lizzeri, 1997.
"Adverse Selection in Durable Goods Markets,"
NBER Working Papers
6194, National Bureau of Economic Research, Inc.
- Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, American Economic Association, vol. 89(5), pages 1097-1115, December.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
- Laffont, Jean-Jacques & Tirole, Jean, 1994.
"Pollution Permits and Compliance Strategies,"
IDEI Working Papers, Institut d'Ãconomie Industrielle (IDEI), Toulouse
39, Institut d'Économie Industrielle (IDEI), Toulouse.
- Laffont, J.J. & Tirole, J., 1995. "Pollution Permits and Compliance Strategies," Papers, Toulouse - GREMAQ 95.395, Toulouse - GREMAQ.
- J-J. Laffont & J. Tirole, 1994. "Pollution Permits and Compliance Strategies," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 95-9, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 729-49, November.
- Preyas Desai & Devavrat Purohit, 1998. "Leasing and Selling: Optimal Marketing Strategies for a Durable Goods Firm," Management Science, INFORMS, INFORMS, vol. 44(11-Part-2), pages S19-S34, November.
- Smith, Clifford W, Jr & Wakeman, L MacDonald, 1985. " Determinants of Corporate Leasing Policy," Journal of Finance, American Finance Association, American Finance Association, vol. 40(3), pages 895-908, July.
- 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.
- Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, Elsevier, vol. 38(3), pages 297-331, July.
- Steven A. Sharpe & Hien H. Nguyen, 1994.
"Capital market imperfections and the incentive to lease,"
Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.)
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, Elsevier, vol. 39(2-3), pages 271-294.
- Grenadier, Steven R., 1996. "Leasing and credit risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(3), pages 333-364, November.
- Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 40(1), pages 61-92, April.
- McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, 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, Elsevier, vol. 24(1), pages 93-97.
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 statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.