Adverse Selection in Durable Goods Markets / Igal Hendel, Alessandro Lizzeri.

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Hendel, Igal

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w6194.Publication details: Cambridge, Mass. National Bureau of Economic Research 1997.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w6194 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w6191 Juvenile Crime and Punishment /	nber w6192 Investment Tax Incentives, Prices, and the Supply of Capital Goods /	nber w6193 The Predictive Validity of Subjective Probabilities of Survival /	nber w6194 Adverse Selection in Durable Goods Markets /	nber w6195 Immigration and the Quality of Jobs /	nber w6196 Restraining the Leviathan: Property Tax Limitation in Massachusetts /	nber w6197 Optimal Management of Indexed and Nominal Debt /	Next

September 1997.

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.