Working Paper: NBER ID: w17030
Authors: Nicola Lacetera; Devin G. Pope; Justin R. Sydnor
Abstract: Can heuristic information processing affect important product markets? We explore whether the tendency to focus on the left-most digit of a number affects how used car buyers incorporate odometer values in their purchase decisions. Analyzing over 22 million wholesale used-car transactions, we find substantial evidence of this left-digit bias; there are large and discontinuous drops in sale prices at 10,000-mile thresholds in odometer mileage, along with smaller drops at 1,000-mile thresholds. We obtain estimates for the inattention parameter in a simple model of this left-digit bias. We also investigate whether this heuristic behavior is primarily attributable to the final used-car customers or the used-car salesmen who buy cars in the wholesale market. The evidence is most consistent with partial inattention by final customers. We discuss the significance of these results for the literature on inattention and point to other market settings where this type of heuristic thinking may be important. Our results suggest that information-processing heuristics may be important even in markets with large stakes and where information is easy to observe.
Keywords: Heuristic Processing; Left-Digit Bias; Used Car Market; Consumer Behavior; Inattention
JEL Codes: D03; D12; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| left-digit bias (D91) | price discontinuities (L11) |
| mileage thresholds (R48) | price discontinuities (L11) |
| final customers' inattention (D19) | price discontinuities (L11) |
| left-digit bias (D91) | wholesale prices (L42) |
| left-digit bias (D91) | supply decisions (M11) |
| mileage thresholds (R48) | smaller price discontinuities (D49) |
| inattention parameter (D91) | depreciation due to mileage (R42) |