Working Paper: NBER ID: w26281
Authors: Richard Blundell; Ran Gu; Søren Leth-Petersen; Hamish Low; Costas Meghir
Abstract: We examine the aggregate implications and distributional consequences of asymmetric information in durable goods markets, with a focus on the car market. Private information introduces a lemons penalty, a wedge between the sale price and the average car value in the population, consequently reducing turnover. We estimate an equilibrium model of car ownership with private information using Danish linked registry data on car ownership, income, and wealth. In the first year of ownership, we estimate the lemons penalty is 12% of the price. The penalty declines sharply with the length of ownership. The penalty reduces the self-insurance value of cars and leads to a large reduction in transaction volumes and the rate of turnover of cars. The market does not collapse: income shocks induce individuals 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 credit limit decreases.
Keywords: asymmetric information; lemons penalty; car market; income shocks; transaction costs
JEL Codes: D12; D14; D15; D4; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private information (D82) | lemons penalty (L15) |
| lemons penalty (L15) | sale price of cars (R48) |
| length of ownership (G32) | lemons penalty (L15) |
| lemons penalty (L15) | self-insurance value of cars (G52) |
| self-insurance value of cars (G52) | transaction volumes (G15) |
| income shocks (J65) | car sales (L81) |
| income uncertainty (D89) | lemons penalty (L15) |
| lemons penalty (L15) | distributional consequences (D39) |