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An sS Model with Adverse Selection

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  • Christopher L. House
  • John V. Leahy

Abstract

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.

Suggested Citation

  • Christopher L. House & John V. Leahy, 2000. "An sS Model with Adverse Selection," NBER Working Papers 8030, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8030
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    References listed on IDEAS

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    1. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, "undated". "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
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    16. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
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    18. Dmitriy Stolyarov, 2002. "Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More?," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1390-1413, December.
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    Citations

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    Cited by:

    1. Christopher L. House, 2008. "Fixed Costs and Long-Lived Investments," NBER Working Papers 14402, National Bureau of Economic Research, Inc.
    2. Alessandro Gavazza & Alessandro Lizzeri & Nikita Roketskiy, 2014. "A Quantitative Analysis of the Used-Car Market," American Economic Review, American Economic Association, vol. 104(11), pages 3668-3700, November.
    3. Susanna Esteban & Matthew Shum, 2007. "Durable-goods oligopoly with secondary markets: the case of automobiles," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 332-354, June.
    4. Igal Hendel & Alessandro Lizzeri & Marciano Siniscalchi, 2005. "Efficient Sorting in a Dynamic Adverse-Selection Model," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 467-497.
    5. Boris Chafwehé, 2017. "Durable Goods Markets in Heterogenous Agents Economies," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2017021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    6. Christopher L. House & Emre Ozdenoren, 2008. "Durable goods and conformity," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 452-468.
    7. House, Christopher L., 2014. "Fixed costs and long-lived investments," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 86-100.
    8. Samuel P. Fraiberger & Arun Sundararajan, 2015. "Peer-to-Peer Rental Markets in the Sharing Economy," Working Papers 15-19, NET Institute.
    9. Raymond Deneckere & Meng-Yu Liang, 2008. "Imperfect durability and the Coase conjecture," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 1-19.
    10. Shutao Cao, 2008. "A Model of Costly Capital Reallocation and Aggregate Productivity," Staff Working Papers 08-38, Bank of Canada.
    11. Dmitriy Stolyarov, 2002. "Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More?," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1390-1413, December.

    More about this item

    JEL classification:

    • 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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