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A model of the used car market with lemons and leasing

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  • Arif Sultan

Abstract

This article extends Kim's (1985) model of the used car market with asymmetric information to examine the possible impacts of leasing and Certified Pre-Owned (CPO) programs on the average quality of traded used cars in the market. The author assumed that a consumer can buy or lease a new car, or he/she can buy a used or a CPO car. While, like Kim (1985), the author assumed that the quality of a car depends on the maintenance level, the maintenance level in this model is chosen when a car is still a 'new' car, i.e. after the warranty ends. The model implied that the average quality of traded used cars can be either higher or lower than the average quality of nontraded used cars. The study also found that leasing and CPO have substantially improved the information mechanism between buyers and sellers of used cars, which, in turn, has helped reduce adverse selection and improved the average quality of traded used cars in the market.

Suggested Citation

  • Arif Sultan, 2010. "A model of the used car market with lemons and leasing," Applied Economics, Taylor & Francis Journals, vol. 42(28), pages 3619-3627.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:28:p:3619-3627
    DOI: 10.1080/00036840802314556
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    References listed on IDEAS

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    1. Sultan, Arif, 2008. "Lemons hypothesis reconsidered: An empirical analysis," Economics Letters, Elsevier, vol. 99(3), pages 541-544, June.
    2. Thomas W. Gilligan, 2004. "Lemons and Leases in the Used Business Aircraft Market," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1157-1186, October.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    4. Preyas Desai & Devavrat Purohit, 1998. "Leasing and Selling: Optimal Marketing Strategies for a Durable Goods Firm," Management Science, INFORMS, vol. 44(11-Part-2), pages 19-34, November.
    5. Igal Hendel & Alessandro Lizzeri, 2002. "The Role of Leasing under Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 113-143, February.
    6. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-665, August.
    7. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
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    Cited by:

    1. Mamada, Robert, 2022. "The market for lemons and information theory," Mathematical Social Sciences, Elsevier, vol. 120(C), pages 107-112.

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