Leasing, Lemons, and Moral Hazard

A number of recent papers have analyzed leasing in the new-car market as a response to the adverse-selection problem in the used-car market originally explored in the seminal 1970 paper by George Akerlof. In this paper we consider a model characterized by both adverse selection, as in these earlier papers, and moral hazard concerning the maintenance choices of new-car drivers. We show that this approach provides explanations for a number of empirical findings concerning real-world new- and used-car markets, including that leasing has become more popular over time, very high income new-car drivers lease more, and used cars that were leased when new sell for more than used cars that were purchased when new. We also compare and contrast our approach to new-car leasing with alternative approaches. (c) 2010 by The University of Chicago. All rights reserved.