The Role of Leasing Under Adverse Selection

38 Pages Posted: 11 Jun 2000 Last revised: 10 Apr 2008

See all articles by Igal Hendel

Igal Hendel

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Alessandro Lizzeri

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 1998

Abstract

Leasing contracts specify a rental rate and an option price at which the used good can be bought at the termination of the lease. This option price cannot be controlled when the car is sold. We show that in a world with symmetric information this additional control variable is useless; equilibrium allocations and profits to lessors are unaffected by the option prices. In contrast, under adverse selection, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. We show that a social planner can use leasing contracts to improve welfare but they are imperfect tools; they cannot generally achieve first best while other mechanisms can. We also show that a producer with market power can benefit from leasing contracts for two reasons: better pricing of the option of keeping the used good, and market segmentation. Moreover, despite the fact that lessors could structure contracts to prevent adverse selection (by raising the option price so high that no lessee keeps the used good) we show that this is not in their interest; a keeping option will always be included in some contracts.

Suggested Citation

Hendel, Igal E. and Lizzeri, Alessandro, The Role of Leasing Under Adverse Selection (May 1998). NBER Working Paper No. w6577, Available at SSRN: https://ssrn.com/abstract=226306

Igal E. Hendel (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alessandro Lizzeri

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
08544 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
72
Abstract Views
1,609
rank
363,060
PlumX Metrics