Leasing, Lemons, and Moral Hazard

Abstract

A number of recent papers have analyzed leasing in the new-car market as a response to the adverse-selection problem in the used-car market originally explored in Akerlof (1970). In this paper we consider a model characterized by both adverse selection as in these earlier papers and moral hazard concerning the maintenance choices of new-car drivers. We show that this approach provides explanations for a number of empirical findings concerning real-world new- and used-car markets including that leasing has become more popular over time, that very high-income new-car drivers lease more, and that used cars leased when new sell for more than used cars purchased when new. We also compare and contrast our approach to new-car leasing with alternative approaches.