Middlemen as Information Intermediaries: Evidence from Used Car Markets
40 Pages Posted: 20 Jul 2017 Last revised: 27 Nov 2017
Date Written: November 22, 2017
We theoretically and empirically examine used car dealers' roles as information intermediaries when asymmetric information is present. Our parsimonious theoretical model predicts that a dealer's price premium (over private sellers) in dollar terms is hump-shaped in car age, and in percentage terms is increasing in car age. The model also predicts that dealer cars are less likely to be resold after a transaction, due to their higher unobserved quality compared to cars sold by private sellers. Our theoretical findings are consistent with administrative data on used car transactions from two large U.S. states.
Keywords: Adverse Selection, Middleman, Dealer, Information Intermediary, Used Car, Automobiles
JEL Classification: D82, D83, L15, L62
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