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An sS Model with Adverse Selection

Listed author(s):
  • Christopher L. House
  • John V. Leahy

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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File URL: http://dx.doi.org/10.1086/383104
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File URL: http://dx.doi.org/10.1086/383104
Download Restriction: Access to the online full text or PDF requires a subscription.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 112 (2004)
Issue (Month): 3 (June)
Pages: 581-614

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Handle: RePEc:ucp:jpolec:v:112:y:2004:i:3:p:581-614
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1995. "Options, the Value of Capital, and Investment," NBER Working Papers 5227, National Bureau of Economic Research, Inc.
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