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Lemons and certified pre-owned cars in the used car market

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  • Arif Sultan

Abstract

I use a modified version of Bond (1982) lemon model to test the quality of certified pre-owned (CPO) and noncertified pre-owned (nonCPO) cars. I use a Tobit model to deal with the censoring problem in the data and apply sensitivity analysis to check the robustness of the coefficients. The data is collected from 'The Panel Study of Income Dynamics (PSID)' from the University of Michigan for this study. The results show that nonCPO cars required more maintenance expenditures than CPO cars of a similar age, which means that the CPO cars are of better quality. The study also implies that the institutions of leasing and certification have substantially improved, which in turn, have contributed to reducing adverse selection and improved the average quality of traded cars in the used car market.

Suggested Citation

  • Arif Sultan, 2010. "Lemons and certified pre-owned cars in the used car market," Applied Economics Letters, Taylor & Francis Journals, vol. 17(1), pages 45-50, January.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:1:p:45-50
    DOI: 10.1080/13504850701719678
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    References listed on IDEAS

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    1. Bruce C. Greenwald & Robert R. Glasspiegel, 1983. "Adverse Selection in the Market for Slaves: New Orleans, 1830–1860," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(3), pages 479-499.
    2. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-665, August.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    4. Wooldridge, Jeffrey M., 1991. "Specification testing and quasi-maximum- likelihood estimation," Journal of Econometrics, Elsevier, vol. 48(1-2), pages 29-55.
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    Cited by:

    1. Chen, Jen-Ming & Hsu, Yu-Ting, 2017. "Revenue management for durable goods using trade-ins with certified pre-owned options," International Journal of Production Economics, Elsevier, vol. 186(C), pages 55-70.

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