TY  - JOUR
AU  - Hendel,Igal
AU  - Lizzeri,Alessandro
TI  - Adverse Selection in Durable Goods Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6194
PY  - 1997
Y2  - September 1997
UR  - http://www.nber.org/papers/w6194
L1  - http://www.nber.org/papers/w6194.pdf
N1  - Author contact info:
Igal Hendel
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8226
Fax: 847/491-7001
E-Mail: igal@northwestern.edu

Alessandro Lizzeri
New York University
Department of Economics
19 W. 4th Street, 6th Floor
New York, NY  10012
E-Mail: alessandro.lizzeri@nyu.edu
AB  - An undesirable feature of Akerlof style models of adverse selection is that ownership of" used cars is independent of preferences and is therefore ad hoc.  We present a dynamic model" that incorporates the market for new goods.  Consumers self-select into buying new or used" goods making ownership of used goods endogenous.  We show that, in contrast with Akerlof and" in agreement with reality, the used market never shuts down and that the volume of trade can be" quite substantial even in cases with severe informational asymmetries.  By incorporating the" market for new goods, the model lends itself to a study of the effects of adverse selection on" manufacturers' incentives.  We find that manufacturers may gain from adverse selection.  We" also give an example in which the market allocation under adverse selection is socially optimal. " An extension of the model to a world with many brands that differ in reliability leads to testable" predictions of the effects of adverse selection.  We show that unreliable car brands have steeper" price declines and lower volumes of trade.
ER  -