Durables and Lemons: Private Information and the Market for Cars

Richard Blundell (), Ran Gu (), Søren Leth-Petersen, Hamish Low and Costas Meghir

No 26281, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the aggregate implications and distributional consequences of asymmetric information in durable goods markets, with a focus on the car market. Private information introduces a lemons penalty, a wedge between the sale price and the average car value in the population, consequently reducing turnover. We estimate an equilibrium model of car ownership with private information using Danish linked registry data on car ownership, income, and wealth. In the first year of ownership, we estimate the lemons penalty is 12% of the price. The penalty declines sharply with the length of ownership. The penalty reduces the self-insurance value of cars and leads to a large reduction in transaction volumes and the rate of turnover of cars. The market does not collapse: income shocks induce individuals to sell their cars, even if they are of good quality, and this helps mitigate the lemons problem. The size of the lemons penalty declines when income uncertainty in the economy increases and when the credit limit decreases.

JEL-codes: D12 D14 D15 D4 E21 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-com, nep-mac and nep-tre
Note: EFG LS
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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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