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Intermediaries and Product Quality in Used Car Markets

Author

Listed:
  • Gary Biglaiser

    () (University of North Carolina at Chapel Hill)

  • Fei Li

    () (University of North Carolina at Chapel Hill)

  • Charles Murry

    () (Department of Economics, Boston College)

  • Yiyi Zhou

    () (Stony Brook University)

Abstract

We examine used car dealers’ roles as intermediaries. We present empirical evidence supporting that cars sold by dealers have higher quality: (1) dealer transaction prices are higher than private market prices and this dealer premium increases in the age of the car as a ratio and is hump-shaped in dollar value, and (2) used cars purchased from dealers are less likely to be resold immediately. We formalize a model to show that these empirical facts can be rationalized either when dealers serve to alleviate information asymmetry between sellers and buyers or when dealers facilitate assortative matching between heterogenous-quality cars and heterogeneous consumers. Lastly, based on predictions of the model, we use the data to distinguish these two theories and find evidence for both, but the preponderance of the evidence supports the asymmetric information theory.

Suggested Citation

  • Gary Biglaiser & Fei Li & Charles Murry & Yiyi Zhou, 2018. "Intermediaries and Product Quality in Used Car Markets," Boston College Working Papers in Economics 969, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:969
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    References listed on IDEAS

    as
    1. Bond, Eric W, 1982. "A Direct Test of the "Lemons" Model: The Market for Used Pickup Trucks," American Economic Review, American Economic Association, vol. 72(4), pages 836-840, September.
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    3. Jonathan R. Peterson & Henry S. Schneider, 2014. "Adverse selection in the used-car market: evidence from purchase and repair patterns in the Consumer Expenditure Survey," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 140-154, March.
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    8. Veronica Guerrieri & Robert Shimer, 2014. "Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality," American Economic Review, American Economic Association, vol. 104(7), pages 1875-1908, July.
    9. Thomas Gehrig, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, March.
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    11. 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.
    12. Berndt, Antje & Gupta, Anurag, 2009. "Moral hazard and adverse selection in the originate-to-distribute model of bank credit," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 725-743, July.
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    More about this item

    Keywords

    Adverse Selection; Sorting; Search Frictions; Car Dealer; Used Car; Intermediary; Middlemen;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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