City Research Online

Abstract

Private information on car quality means the sale price reflects the average quality of cars sold, which can be lower than the average quality in the population. This difference is the lemons penalty imposed on holders of high-quality cars. We estimate the evolution of the lemons penalty through an equilibrium model of car ownership with private information using Danish linked registry data on car ownership, income, and wealth. We examine the aggregate implications and distributional consequences of these penalties. In the first year of ownership, we estimate that the lemons penalty is 12% of the price. The penalty declines sharply with the length of ownership. It reduces the self-insurance value of cars and leads to a large reduction in transaction volumes and the rate of car turnover. The market does not collapse: income shocks induce households to sell their cars, even if they are of good quality, and this helps mitigate the lemons problem. The size of the lemons penalty declines when income uncertainty in the economy increases and when the supply of credit decreases.

Publication Type:	Article
Additional Information:	This article will be published in Quantitative Economics and it will be available online at: onlinelibrary.wiley.com/journal/17597331
Publisher Keywords:	Lemons penalty, asymmetric information, car market, income uncertainty, life-cycle equilibrium model
Subjects:	H Social Sciences > HB Economic Theory
Departments:	School of Policy & Global Affairs School of Policy & Global Affairs > Department of Economics
SWORD Depositor:	Symplectic Administrator

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