American Economic Review: Vol. 89 No. 5 (December 1999)


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Adverse Selection in Durable Goods Markets

Article Citation

Hendel, Igal, and Alessandro Lizzeri. 1999. "Adverse Selection in Durable Goods Markets." American Economic Review, 89(5): 1097-1115.

DOI: 10.1257/aer.89.5.1097


We present a dynamic model of adverse selection to examine the interactions between new and used goods markets. We find that the used market never shuts down, the volume of trade can be large, and distortions are lower than previously thought. New cars prices can be higher under adverse selection than in its absence. An extension to several brands that differ in reliability leads to testable predictions of the effects of adverse selection. Unreliable brands have steeper price declines and lower volumes of trade. We contrast these predictions with those of a model where brands physically depreciate at different rates.

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Hendel, Igal (Princeton U and NBER)
Lizzeri, Alessandro (Princeton U)

JEL Classifications

D82: Asymmetric and Private Information
L15: Information and Product Quality; Standardization and Compatibility

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