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

Format:

Book

Author/Creator:

Hendel, Igal.

Contributor:

National Bureau of Economic Research.

Lizzeri, Alessandro.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6194.

NBER working paper series no. w6194

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

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.

Notes:

Print version record

September 1997.