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The market for used cars: new evidence of the lemons phenomenon

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  • Winand Emons
  • George Sheldon

Abstract

The lemons model assumes that owners of used cars have an information advantage over potential buyers with respect to the quality of their vehicles. Owners of bad cars try to sell them to ill-informed buyers while owners of good cars hold on to theirs. Consequently, the quality of traded automobiles tends to be sub-average. In contrast to previous empirical work, the following article investigates the behaviour of both buyers and sellers, testing for adverse selection by sellers and for quality uncertainty among buyers with a sample consisting of all 1985 cars registered in the Swiss canton of Basle City over the period 1985 to 1991. Our data supports both adverse selection and buyer uncertainty, suggesting that a lemons problem exists.

Suggested Citation

  • Winand Emons & George Sheldon, 2009. "The market for used cars: new evidence of the lemons phenomenon," Applied Economics, Taylor & Francis Journals, vol. 41(22), pages 2867-2885.
    • Handle: RePEc:taf:applec:v:41:y:2009:i:22:p:2867-2885
    DOI: 10.1080/00036840802277332
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    References listed on IDEAS

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    1. Robert H. Porter & Peter Sattler, 1999. "Patterns of Trade in the Market for Used Durables: Theory and Evidence," NBER Working Papers 7149, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Ma, Xingliang & Spielman, David J. & Nazli, Hina & Zambrano, Patricia & Zaidi, Fatima & Kouser, Shahzad, 2014. "Information efficiency in a lemons market: Evidence from Bt cotton seed market in Pakistan," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 175278, Agricultural and Applied Economics Association.
    2. Hoffmann, Vivian & Mutiga, Samuel & Harvey, Jagger & Nelson, Rebecca & Milgroom, Michael, 2013. "Asymmetric Information and Food Safety: Maize in Kenya," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151288, Agricultural and Applied Economics Association.
    3. Justin P. Johnson & Henry S. Schneider & Michael Waldman, 2014. "The Role and Growth of New-Car Leasing: Theory and Evidence," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 665-698.
    4. Justin P. Johnson & Michael Waldman, 2010. "Leasing, Lemons, and Moral Hazard," Journal of Law and Economics, University of Chicago Press, vol. 53(2), pages 307-328, May.
    5. Born, Alexander & Kovachka, Nikoleta & Lessmann, Stefan & Seow, Hsin-Vonn, 2018. "Price Management in the Used-Car Market: An Evaluation of Survival Analysis," IRTG 1792 Discussion Papers 2018-065, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    6. Strittmatter, Anthony & Lechner, Michael, 2020. "Sorting in the used-car market after the Volkswagen emission scandal," Journal of Environmental Economics and Management, Elsevier, vol. 101(C).
    7. Jonathan R. Peterson & Henry S. Schneider, 2017. "Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting," Management Science, INFORMS, vol. 63(9), pages 3111-3127, September.
    8. Jonathan R. Peterson & Henry S. Schneider, 2014. "Adverse selection in the used-car market: evidence from purchase and repair patterns in the Consumer Expenditure Survey," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 140-154, March.
    9. Jordan Martel & Kenneth Mirkin & Brian Waters, 2022. "Learning by Owning in a Lemons Market," Journal of Finance, American Finance Association, vol. 77(3), pages 1737-1785, June.

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