Working Paper: NBER ID: w6577
Abstract: Leasing contracts specify a rental rate and an option price at which the used good can be bought at the termination of the lease. This option price cannot be controlled when the car is sold. We show that in a world with symmetric information this additional control variable is useless; equilibrium allocations and profits to lessors are unaffected by the option prices. In contrast, under adverse selection, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. We show that a social planner can use leasing contracts to improve welfare but they are imperfect tools; they cannot generally achieve first best while other mechanisms can. We also show that a producer with market power can benefit from leasing contracts for two reasons: better pricing of the option of keeping the used good, and market segmentation. Moreover, despite the fact that lessors could structure contracts to prevent adverse selection (by raising the option price so high that no lessee keeps the used good) we show that this is not in their interest; a keeping option will always be included in some contracts.
Keywords: Leasing; Durable Goods; Adverse Selection
JEL Codes: D82; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Leasing contracts (K12) | Consumer behavior (D19) |
| Leasing contracts (K12) | Market outcomes (D49) |
| Lessees (R33) | Higher valuation consumers (D11) |
| Leasing contracts (K12) | Market segmentation (M31) |
| Leasing contracts (K12) | Quality of used cars (L15) |
| Leasing contracts (K12) | Control market allocations (D45) |
| Leasing contracts (K12) | Alleviate welfare distortions from adverse selection (D69) |
| Leasing contracts cannot fully resolve (D86) | Misallocation of used goods among buyers (D16) |
| Appropriate mechanism (D47) | First-best allocation (D61) |
| Lessees (R33) | Higher turnover rates of leased cars (R48) |