'Vettes and Lemons on Ebay

Abstract

Using bid data from 8,000 new and used Chevrolet Corvettes sold on eBay, this paper empirically tests Akerlof's (1970) hypothesis that the used car market is characterized by low quality and informational problems. The hypothesis states that the used market has a higher proportion of low quality cars than the new market and buyers account for the difference by discounting their value for a used car relative to a new car. This is tested by comparing bids on new and late model used 'Vettes. The paper finds little evidence of a premium for new 'Vettes. The paper also considers a natural generalization of Akerlof's (1970) model which allows potential bidders to have different and incomplete private information about the quality of the used car. One implication is that a rational bidder will bid late in the auction in order to reduce the likelihood of other bidders observing her private information. A second implication is that a rational bidder will discount her bid in order to reduce the likelihood of winning the auction because her private information is incorrect (the winner's curse). We test the first implication by comparing bid times on new and used cars and by comparing bid times on newer and older used cars. Akerlof (1970) suggests that the quality and informational problems will be larger with used cars relative to new cars, and other empirical work suggests that quality and informational problems are larger for older used cars relative to newer used cars. Therefore, we expect to find more late bidding on used cars relative to new cars and older used cars relative to newer used cars. If anything, we find that the opposite is true for 'Vettes. To test the second implication we compare bidding on used 'Vettes for auctions with different numbers of expected bidders. Recent theory suggests that bidders facing a winner's curse problem will bid less as the number of expected potential bidders increase. Our analysis suggests bidders bid slightly more in auctions with a higher number of expected bidders. Overall, for used Chevrolet Corvettes sold on eBay there is little empirical support for the hypothesis presented in Akerlof (1970). It is not clear, however, whether these results generalize to other cars sold on eBay or cars sold in the off-line used market.

Keywords: Lemons, Used Cars, eBay

JEL Classification: D12, D44, D52, D82, L81, L92