Durables and Lemons: Private Information and the Market for Cars
Research output: Working paper › Research
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Durables and Lemons: Private Information and the Market for Cars. / Blundell, Richard W.; Gu, Ran; Leth-Petersen, Søren; Low, Hamish; Meghir, Costas.
2019.Research output: Working paper › Research
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TY - UNPB
T1 - Durables and Lemons: Private Information and the Market for Cars
AU - Blundell, Richard W.
AU - Gu, Ran
AU - Leth-Petersen, Søren
AU - Low, Hamish
AU - Meghir, Costas
PY - 2019
Y1 - 2019
N2 - 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.
AB - 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.
KW - Lemons penalty
KW - Car market
KW - Income uncertainty
KW - Estimated life-cycle equilibrium model
M3 - Working paper
T3 - CEBI Working Paper Series
BT - Durables and Lemons: Private Information and the Market for Cars
ER -
ID: 248808653