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Adverse selection in the used‐car market: evidence from purchase and repair patterns in the Consumer Expenditure Survey
Author(s) -
Peterson Jonathan R.,
Schneider Henry S.
Publication year - 2014
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12045
Subject(s) - adverse selection , consumer expenditure survey , sorting , selection (genetic algorithm) , economics , quality (philosophy) , central air conditioning , information asymmetry , adverse effect , business , public economics , microeconomics , air conditioning , medicine , computer science , philosophy , aggregate expenditure , epistemology , artificial intelligence , programming language , physics , thermodynamics
We analyze adverse selection in the used‐car market using a new approach that considers a car as an assemblage of parts, some with symmetric information and others with asymmetric information. Using data from the Consumer Expenditure Survey and Consumer Reports, we examine turnover and repair patterns. We find evidence of adverse selection due to the conditions of the transmission, engine, and, during colder months, air‐conditioning; and sorting due to the conditions of the vehicle body and, during warmer months, air‐conditioning. Our quantification exercises indicate that adverse selection may have a meaningful effect on trade volume and quality in the secondhand market.

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