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Durables and Lemons: Private Information and the Market for Cars

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Abstract

We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.

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  • Richard Blundell & Ran Gu & Soren Leth-Petersen & Hamish Low & Costas Meghir, 2019. "Durables and Lemons: Private Information and the Market for Cars," Cowles Foundation Discussion Papers 2197, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:2197
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    1. Durables and Lemons: Private Information and the Market for Cars
      by Christian Zimmermann in NEP-DGE blog on 2019-10-03 23:13:54

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    1. Andreas Engelmann & Ingrid Bauer & Mateusz Dolata & Michael Nadig & Gerhard Schwabe, 2022. "Promoting Less Complex and More Honest Price Negotiations in the Online Used Car Market with Authenticated Data," Group Decision and Negotiation, Springer, vol. 31(2), pages 419-451, April.
    2. Dariel, Aurelie & Riedl, Arno & Siegenthaler, Simon, 2021. "Referral hiring and wage formation in a market with adverse selection," Games and Economic Behavior, Elsevier, vol. 130(C), pages 109-130.

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    More about this item

    Keywords

    Lemons penalty; Car market; Estimated life-cycle equilibrium model;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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