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Durables and Lemons: Private Information and the Market for Cars -- by Richard Blundell, Ran Gu, Søren Leth-Petersen, Hamish Low, Costas Meghir

Car owners know more about their own car quality than buyers. This asymmetry in information affects the price that buyers are willing to pay, and in turn the quality of cars that car owners are willing to actually sell. We set-up a equilibrium model of car ownership with private information where individuals sell and purchases new and second-hand cars over their life-cycle. We show how private information introduces a transaction cost and this reduces the value of owning the car, and in particular, reduces the value of a car as a savings instrument. We estimate the model using data on car ownership and quality from Denmark, linked to population register data. We quantify the lemons penalty and show how much private information distorts the market for cars: the lemons penalty is estimated to be 18% of the price in the first year of ownership, but the penalty falls sharply with the length of ownership. We show that fewer cars are sold within the first two years of ownership in comparison to a full information case. The lemons penalty is found to significantly delay replacement and reduce the probability of downgrading at job loss.
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