Durables and Lemons: Private Information and the Market for Cars

Richard Blundell (), Ran Gu (), Søren Leth-Petersen, Hamish Low and Costas Meghir ()
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Costas Meghir: Cowles Foundation, Yale University, NBER, IZA, CEPR, and Institute for Fiscal Studies, https://economics.yale.edu/people/faculty/costas-meghir

No 2197R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Keywords: Lemons penalty; Car market; Income uncertainty; Estimated life-cycle equilibrium model (search for similar items in EconPapers)
JEL-codes: D15 D82 E21 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-09
New Economics Papers: this item is included in nep-com, nep-mac and nep-tre
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Durables and Lemons: Private Information and the Market for Cars (2019)
Working Paper: Durables and Lemons: Private Information and the Market for Cars (2019)
Working Paper: Durables and Lemons: Private Information and the Market for Cars (2019)
Working Paper: Durables and Lemons: Private Information and the Market for Cars (2019)
Working Paper: Durables and Lemons: Private Information and the Market for Cars (2019)
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