The Market for Used Cars: New Evidence of the Lemons Phenomenon
University of Bern, Department of Economics Discussion Paper 02.02
35 Pages Posted: 29 Apr 2002 Last revised: 18 Jul 2008
Date Written: June 14, 2007
The lemons model assumes that owners of used cars have an informational advantage over potential buyers with respect to the quality of their vehicles. Owners of bad cars will try to sell them to unsuspecting buyers while owners of good cars will hold on to theirs. Consequently, the quality of traded automobiles should be sub-average. In contrast to previous work, the following paper tests both the assumption of informa-tional asymmetry and the prediction of sub-average traded car quality using a sample consisting of all 1985 cars registered in the Swiss canton of Basle-City over the period 1985-1991. Our data support both the assumption and the prediction of the lemons model. The lemons problem does not appear to be widespread, however.
Keywords: adverse selection, used car market, duration models
JEL Classification: C41, D82, L15, L62
Suggested Citation: Suggested Citation