Durables and Lemons: Private Information and the Market for Cars / Richard Blundell, Ran Gu, Søren Leth-Petersen, Hamish Low, Costas Meghir.

Format:

Book

Author/Creator:

Blundell, Richard.

Contributor:

National Bureau of Economic Research.

Gu, Ran.

Leth-Petersen, Søren.

Low, Hamish.

Meghir, Costas.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26281.

NBER working paper series no. w26281

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Durables and Lemons

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

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.

Notes:

Print version record

September 2019.