Lemons and Leases in the Used Business Aircraft Market

Abstract

Given adverse selection, durable goods that trade infrequently depreciate quickly. Consistent with this prediction I find an inverse relationship between depreciation and trading volume for less reliable brands of used business aircraft. Additionally, recent theoretical analyses suggest that leasing, by increasing the average quality of used goods, may reduce adverse selection in durable goods markets. Indeed, I find a direct relationship between depreciation and trading volume for aircraft models with relatively high lease rates. Together these findings suggest that adverse selection is a prominent feature of the contemporary used business aircraft market and that leasing mitigates the consequences of adverse selection.

Keywords: Industrial Organization, Adverse Selection, Durable Goods, Leasing, Business Aircraft

JEL Classification: C23, C33, D82, L15, L62