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Leasing, Lemons, and Moral Hazard

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  • Justin P. Johnson
  • Michael Waldman

Abstract

A number of recent papers have analyzed leasing in the new-car market as a response to the adverse-selection problem in the used-car market originally explored in the seminal 1970 paper by George Akerlof. In this paper we consider a model characterized by both adverse selection, as in these earlier papers, and moral hazard concerning the maintenance choices of new-car drivers. We show that this approach provides explanations for a number of empirical findings concerning real-world new- and used-car markets, including that leasing has become more popular over time, very high income new-car drivers lease more, and used cars that were leased when new sell for more than used cars that were purchased when new. We also compare and contrast our approach to new-car leasing with alternative approaches. (c) 2010 by The University of Chicago. All rights reserved.

Suggested Citation

  • Justin P. Johnson & Michael Waldman, 2010. "Leasing, Lemons, and Moral Hazard," Journal of Law and Economics, University of Chicago Press, vol. 53(2), pages 307-328, May.
  • Handle: RePEc:ucp:jlawec:v:53:y:2010:i:2:p:307-328
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    References listed on IDEAS

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    1. Johnson, Justin P & Waldman, Michael, 2003. " Leasing, Lemons, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 247-265, Summer.
    2. Eric W. Bond & Larry Samuelson, 1984. "Durable Good Monopolies with Rational Expectations and Replacement Sales," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 336-345, Autumn.
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    Cited by:

    1. Gerstle, Ari D. & Waldman, Michael, 2016. "Mergers in durable-goods industries: A re-examination of market power and welfare effects," Research in Economics, Elsevier, vol. 70(4), pages 677-692.
    2. Igal Hendel & Alessandro Lizzeri & Marciano Siniscalchi, 2000. "Efficient Sorting in a Dynamic Adverse Selection Model: The Hot Potato," Econometric Society World Congress 2000 Contributed Papers 1209, Econometric Society.
    3. Maarten C. W. Janssen & Vladimir A. Karamychev, 2002. "Cycles and multiple equilibria in the market for durable lemons," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(3), pages 579-601.
    4. Hartmann-Wendels, Thomas, 2004. "Die Bedeutung des Leasings für die Unternehmensfinanzierung: Theoretische Perspektiven und empirische Ergebnisse," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 2(2), pages 7-40.
    5. Bilancini, Ennio & Boncinelli, Leonardo, 2016. "Dynamic adverse selection and the supply size," European Economic Review, Elsevier, vol. 83(C), pages 233-242.
    6. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo Group Munich.
    7. Yan, Wei & Li, Youwei & Wu, Ying & Palmer, Mark, 2016. "A rising e-channel tide lifts all boats? The impact of manufacturer multi-channel encroachment on traditional selling and leasing," MPRA Paper 70747, University Library of Munich, Germany.
    8. Harstad, Bård, 2016. "The market for conservation and other hostages," Journal of Economic Theory, Elsevier, vol. 166(C), pages 124-151.
    9. Chemmanur, Thomas & Jiao, Yawen & Yan, An, 2010. "A theory of contractual provisions in leasing," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 116-142, January.

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