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Adverse Selection in Durable Goods Markets

Adverse Selection in Durable Goods Markets 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 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Adverse Selection in Durable Goods Markets

American Economic Review , Volume 89 (5) – Dec 1, 1999

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Publisher
American Economic Association
Copyright
Copyright © 1999 by the American Economic Association
Subject
Articles
ISSN
0002-8282
DOI
10.1257/aer.89.5.1097
Publisher site
See Article on Publisher Site

Abstract

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 )

Journal

American Economic ReviewAmerican Economic Association

Published: Dec 1, 1999

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