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Durables and Lemons: Private Information and the Market for Cars

Author

Listed:
  • Richard Blundell
  • Ran Gu
  • Søren Leth-Petersen
  • Hamish Low
  • Costas Meghir

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. This private information introduces a transaction cost, distorts the market and reduces the value of a car as a savings instrument. We estimate the model using Danish linked registry data on car ownership, income and wealth. The transaction cost, which we term 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 in the event of an adverse income shock. The size of the lemons penalty declines when uncertainty in the economy increases, as in recessions: large income shocks induce individuals to sell their cars, even if of good quality, and this reduces the lemons problem.

Suggested Citation

  • Richard Blundell & Ran Gu & Søren Leth-Petersen & Hamish Low & Costas Meghir, 2019. "Durables and Lemons: Private Information and the Market for Cars," NBER Working Papers 26281, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26281
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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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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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