Leasing, Lemons, and Buybacks

Justin P Johnson and Michael Waldman

RAND Journal of Economics, 2003, vol. 34, issue 2, 247-65

Abstract: In his seminal article of 1970, Akerlof argued that the used-car market is not efficient because adverse selection causes too little trade. We construct a competitive model of the new- and used-car markets and investigate the relationship between new-car leasing and adverse selection. Our analysis yields a number of interesting results, including that new-car leasing reduces the adverse-selection problem, and that buybacks also increase efficiency in the secondhand market. We also discuss alternative explanations for new-car leasing and an explanation for the growth in new-car leasing during the last fifteen years. Copyright 2003 by the RAND Corporation.

Date: 2003
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