An Ss Model with Adverse Selection

Posted: 3 May 2004

See all articles by Christopher L. House

Christopher L. House

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

John V. Leahy

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

We present a model of the market for a used durable in which agents face fixed costs of adjustment, the magnitude of which depends on the degree of adverse selection in the secondary market. We find that, unlike typical models, the sS bands in our model contract as the variance of the shock increases. We also analyze a dynamic version of the model in which agents are allowed to make decisions that are conditional on the age of the durable. We find that, as the durable ages, the lemons problem tends to decline in importance, and the sS bands contract.

Suggested Citation

House, Christopher L. and Leahy, John V., An Ss Model with Adverse Selection. Available at SSRN: https://ssrn.com/abstract=539022

Christopher L. House

University of Michigan at Ann Arbor - Department of Economics ( email )

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John V. Leahy (Contact Author)

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