Adverse Selection in Durable Goods Markets

Igal Hendel and Alessandro Lizzeri

No 6194, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: An undesirable feature of Akerlof style models of adverse selection is that ownership of" used cars is independent of preferences and is therefore ad hoc. We present a dynamic model" that incorporates the market for new goods. Consumers self-select into buying new or used" goods making ownership of used goods endogenous. We show that, in contrast with Akerlof and" in agreement with reality, the used market never shuts down and that the volume of trade can be" quite substantial even in cases with severe informational asymmetries. By incorporating the" market for new goods, the model lends itself to a study of the effects of adverse selection on" manufacturers' incentives. We find that manufacturers may gain from adverse selection. We" also give an example in which the market allocation under adverse selection is socially optimal. " An extension of the model to a world with many brands that differ in reliability leads to testable" predictions of the effects of adverse selection. We show that unreliable car brands have steeper" price declines and lower volumes of trade.

JEL-codes: D82 L15 (search for similar items in EconPapers)
Date: 1997-09
Note: IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as American Economic Review, Vol. 89, no. 5 (December 1999): 1097-1115.

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Journal Article: Adverse Selection in Durable Goods Markets (1999)
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