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The Market for Used Cars: A New Test of the Lemons Model

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  • Winand Emons
  • George Sheldon

Abstract

The Lemons model assumes that owners of used cars have an informational advantage over potential buyers with respect to the quality of their vehicles. Owners of bad cars will try to sell them to unsuspecting buyers while owners of good cars will hold on to theirs. Consequently, the quality of traded automobiles should be sub-average. In contrast to previous work, the following paper tests both the assumption of informational asymmetry and the prediction of sub-average traded car quality using a sample consisting of all 1985 cars registered in the Swiss canton of Basle-City over the period 1985-1991. Our data support both the assumption and the prediction of the lemons model. The lemons problem does not appear to be widespread, however.

Suggested Citation

  • Winand Emons & George Sheldon, 2002. "The Market for Used Cars: A New Test of the Lemons Model," Diskussionsschriften dp0202, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp0202
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    Cited by:

    1. Selby, Brent & Kockelman, Kara M., 2012. "Microsimulating Automobile Markets: Evolution of Vehicle Holdings and Vehicle Pricing Dynamics," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 51(2).
    2. Mamada, Robert, 2022. "The market for lemons and information theory," Mathematical Social Sciences, Elsevier, vol. 120(C), pages 107-112.
    3. Sylvain Prado, 2010. "A Family Hitch: Econometrics of the New and the Used Car Markets," Working Papers hal-04140927, HAL.
    4. Anindya Ghose, 2005. "Used Good Trade Patterns: A Cross-Country Comparison of Electronic Secondary Markets," Working Papers 05-19, NET Institute, revised Oct 2005.
    5. Christopher Adams & Laura Hosken & Peter Newberry, 2011. "Vettes and lemons on eBay," Quantitative Marketing and Economics (QME), Springer, vol. 9(2), pages 109-127, June.
    6. Peter Kooreman & Marco Haan, 2006. "Price Anomalies in the Used Car Market," De Economist, Springer, vol. 154(1), pages 41-62, March.
    7. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    8. Anagol, Santosh, 2017. "Adverse selection in asset markets: Theory and evidence from the Indian market for cows," Journal of Development Economics, Elsevier, vol. 129(C), pages 58-72.
    9. Avner Offer, 2005. "The Markup for Lemons: Quality and Uncertainty in American and British Used-Car Markets c.1953-1973," Oxford Economic and Social History Working Papers _060, University of Oxford, Department of Economics.
    10. Avner Offer, 2005. "The Markup for Lemons: Quality and Uncertainty in American and British Used-Car Markets, c. 1953-1973," Oxford University Economic and Social History Series _060, Economics Group, Nuffield College, University of Oxford.

    More about this item

    Keywords

    adverse selection; used car market; duration models;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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