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An sS Model with Adverse Selection

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  • Christopher L. House
  • John V. Leahy

Abstract

We present a model of the market for used cars in which agents face a fixed cost of adjustment, the magnitude of which depend on the degree of adverse selection in the secondary market. We find that, unlike typical models, the sS bands in our model contract as the variance of the shock process increases. We also analyze a dynamic version of the model in which agents are allowed to make decisions that are conditional of the age of a used car. We find that, as a car ages, the lemons problem tends to decline in importance, and the sS bands contract.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8030.

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Date of creation: Dec 2000
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Handle: RePEc:nbr:nberwo:8030

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  1. Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Sanford J Grossman & Guy Laroque, 2003. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Levine's Working Paper Archive 618897000000000803, David K. Levine.
  3. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  4. Leif Danziger, 1998. "A Dynamic Economy with Costly Price Adjustment," Cahiers de recherche CREFE / CREFE Working Papers 83, CREFE, Université du Québec à Montréal.
  5. Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, vol. 59(1), pages 1-30, 02.
  6. Christopher D Carroll & Wendy E Dunn, 1997. "Unemployment Expectations Jumping (Ss) Triggers and Household Balance Sheets," Economics Working Paper Archive 386, The Johns Hopkins University,Department of Economics.
  7. Caballero, R.J., 1990. "Durable Goods: An Explanation For Their Slow Adjustment," Discussion Papers 1990_49, Columbia University, Department of Economics.
  8. Igal Hendel & Alessandro Lizzeri, 1997. "Adverse Selection in Durable Goods Markets," NBER Working Papers 6194, National Bureau of Economic Research, Inc.
  9. Caballero, Ricardo J, 1994. "Notes on the Theory and Evidence on Aggregate Purchases of Durable Goods," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 107-17, Summer.
  10. Eberly, J.C., 1990. "Adjustment of Consumers'durables Stocks: Evidence from Automobile Purchases," Weiss Center Working Papers 22-91, Wharton School - Weiss Center for International Financial Research.
  11. Milgrom, Paul & Roberts, John, 1994. "Comparing Equilibria," American Economic Review, American Economic Association, vol. 84(3), pages 441-59, June.
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  14. Max Blouin, 2000. "Overlapping Generations of Cars," Cahiers de recherche CREFE / CREFE Working Papers 117, CREFE, Université du Québec à Montréal.
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Cited by:
  1. Nikita Roketskiy & Alessandro Lizzeri & Alessandro Gavazza, 2012. "A Quantitative Analysis of the Used Car Market," 2012 Meeting Papers 173, Society for Economic Dynamics.
  2. Christopher L. House & Emre Ozdenoren, 2008. "Durable goods and conformity," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 452-468.
  3. Christopher L. House, 2008. "Fixed Costs and Long-Lived Investments," NBER Working Papers 14402, National Bureau of Economic Research, Inc.
  4. Alessandro Lizzeri, 2003. "Efficient Sorting in a Dynamic Adverse Selection Model," Theory workshop papers 505798000000000098, UCLA Department of Economics.
  5. Shutao Cao, 2008. "A Model of Costly Capital Reallocation and Aggregate Productivity," Working Papers 08-38, Bank of Canada.
  6. Christopher House, 2008. "Fixed Costs and Long-Lived Investments," 2008 Meeting Papers 3, Society for Economic Dynamics.
  7. Esteban, Susanna & Shum, Matthew, . "Durable Goods Oligopoly with Secondary Markets: the Case of Automobiles," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/4993, Universidad Carlos III de Madrid.

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