Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting

Jonathan R. Peterson () and Henry S. Schneider ()
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Jonathan R. Peterson: Graduate School of Business, Nazarbayev University, Astana 020000, Kazakhstan; and Department of Economics and Finance, Louisiana Tech University, Ruston, Louisiana 71272
Henry S. Schneider: Smith School of Business, Queen’s University, Kingston, Ontario K7L 3N6, Canada

Management Science, 2017, vol. 63, issue 9, 3111-3127

Abstract: We document a basic characteristic of adverse selection in secondhand markets for durable goods: goods with higher observed quality may have more adverse selection and hence lower unobserved quality. We provide a simple theoretical model to demonstrate this result, which is a consequence of the interaction of sorting between drivers over observed quality and adverse selection over unobserved quality. We then offer empirical support using data on secondhand prices and repair rates of used cars from the Consumer Expenditure Survey, and discuss a number of implications for everyday advertising and consumer questions.

Keywords: microeconomics; market structure and pricing; industrial organization: firm objectives; marketing; pricing (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:63:y:2017:i:9:p:3111-3127

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