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Leasing, Lemons, and Moral Hazard

  • Justin P. Johnson
  • Michael Waldman

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.

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Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 53 (2010)
Issue (Month): 2 (05)
Pages: 307-328

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Handle: RePEc:ucp:jlawec:v:53:y:2010:i:2:p:307-328
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  2. Franks, Julian R & Hodges, Stewart D, 1987. " Lease Valuation When Taxable Earnings Are a Scarce Resource," Journal of Finance, American Finance Association, vol. 42(4), pages 987-1005, September.
  3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
  4. Winand Emons & George Sheldon, 2009. "The market for used cars: new evidence of the lemons phenomenon," Applied Economics, Taylor & Francis Journals, vol. 41(22), pages 2867-2885.
  5. Mann, Duncan P., 1992. "Durable goods monopoly and maintenance," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 65-79, March.
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  7. Johnson, Justin P & Waldman, Michael, 2003. " Leasing, Lemons, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 247-65, Summer.
  8. Smith, Clifford W, Jr & Wakeman, L MacDonald, 1985. " Determinants of Corporate Leasing Policy," Journal of Finance, American Finance Association, vol. 40(3), pages 895-908, July.
  9. Igal Hendel & Alessandro Lizzeri, 1999. "Interfering with Secondary Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 1-21, Spring.
  10. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
  11. Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 273-283.
  12. Richard Schmalensee, 1974. "Market Structure, Durability, and Maintenance Effort," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 277-287.
  13. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  14. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  15. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, vol. 80(5), pages 1062-76, December.
  16. Preyas Desai & Devavrat Purohit, 1998. "Leasing and Selling: Optimal Marketing Strategies for a Durable Goods Firm," Management Science, INFORMS, vol. 44(11-Part-2), pages S19-S34, November.
  17. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
  18. 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.
  19. Mannering, Fred & Winston, Clifford & Starkey, William, 2002. "An exploratory analysis of automobile leasing by US households," Journal of Urban Economics, Elsevier, vol. 52(1), pages 154-176, July.
  20. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
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  22. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-65, August.
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