Adverse selection in durable goods markets

Igal Hendel, Alessandro Lizzeri

    Research output: Contribution to journalArticle

    Abstract

    We present a dynamic model of adverse selection to examine the interactions between new and used goods markets. We find that the used market never shuts down, the volume of trade can be large, and distortions are lower than previously thought. New cars prices can be higher under adverse selection than in its absence. An extension to several brands that differ in reliability leads to testable predictions of the effects of adverse selection. Unreliable brands have steeper price declines and lower volumes of trade. We contrast these predictions with those of a model where brands physically depreciate at different rates. (JEL D82, L15).

    Original languageEnglish (US)
    Pages (from-to)1097-1115
    Number of pages19
    JournalAmerican Economic Review
    Volume89
    Issue number5
    DOIs
    StatePublished - Dec 1999

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    ASJC Scopus subject areas

    • Economics and Econometrics

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