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Durables and Lemons: Private Information and the Market for Cars

Author

Listed:
  • Richard Blundell

    (University College London and Institute for Fiscal Studies)

  • Ran Gu

    (University of Essex and Institute for Fiscal Studies)

  • Soeren Leth-Petersen

    (CEBI, Department of Economics, University of Copenhagen)

  • Hamish Low

    (University of Oxford and Institute for Fiscal Studies)

  • Costas Meghir

    (Yale University, NBER and Institute for Fiscal Studies)

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.

Suggested Citation

  • Richard Blundell & Ran Gu & Soeren Leth-Petersen & Hamish Low & Costas Meghir, 2019. "Durables and Lemons: Private Information and the Market for Cars," CEBI working paper series 19-07, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    • Handle: RePEc:kud:kucebi:1907
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    File URL: https://www.econ.ku.dk/cebi/publikationer/working-papers/CEBI_WP_07-19.rev1..pdf
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    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

    Citations

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    Cited by:

    1. Rory McGee, 2023. "Adverse selection among early adopters and unraveling innovation," IFS Working Papers W23/40, Institute for Fiscal Studies.
    2. Roy McGee, 2023. "Adverse Selection Among Early Adopters and Unraveling Innovation," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 2022302, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    3. 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.
    4. 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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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