Working Paper: CEPR ID: DP12633
Authors: Sarit Weisburd; Daniel Bird; Ronny Benporath
Abstract: We study the problem faced by a car-leasing firm in the presence of both adverse selection and moral hazard. While the literature has primarily focused on the role of leasing in avoiding adverse selection and the role of an above market buyback price in this environment, we show how this result reverses when moral hazard concerns are severe. The key driver of this result is that a low buy back price can incentivize non-contractible investment. We test the model using a difference-in-differences technique to compare accident outcomes of individuals driving leased company vehicles in Israel before and after a tax change and differentiate between drivers by their probability of utilizing the buyback clause. Our analysis shows that once exiting the leasing cycle becomes a relevant option due to a 110 percent increase in the tax rate on company cars it decreases the at-fault accident rate by half an accident per year (s.e. 0.25) for relevant drivers.
Keywords: moral hazard; adverse selection; leasing; buyback
JEL Codes: D82; L91; D4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax Increase (H29) | Leasing Costs (K12) |
| Leasing Costs (G32) | Accident Rates (J28) |
| Tax Increase (H29) | Accident Rates (J28) |
| Tax Increase (H29) | Buyback Option Relevance (L14) |
| Buyback Option Relevance (L14) | Vehicle Maintenance (R42) |
| Vehicle Maintenance (R42) | Accident Rates (J28) |