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The market for used cars: new evidence of the lemons phenomenon

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Abstract:

The lemons model assumes that owners of used cars have an information advantage over potential buyers with respect to the quality of their vehicles. Owners of bad cars try to sell them to ill-informed buyers while owners of good cars hold on to theirs. Consequently, the quality of traded automobiles tends to be sub-average. In contrast to previous empirical work, the following article investigates the behaviour of both buyers and sellers, testing for adverse selection by sellers and for quality uncertainty among buyers with a sample consisting of all 1985 cars registered in the Swiss canton of Basle City over the period 1985 to 1991. Our data supports both adverse selection and buyer uncertainty, suggesting that a lemons problem exists.

Document Type: Research Article

DOI: https://doi.org/10.1080/00036840802277332

Affiliations: 1: Department of Economics, University of Bern, Schanzeneckstrasse 1, CH-3001 Bern, Switzerland 2: Department of Economics, FAI, University of Basle, CH-4003 Basle, Switzerland

Publication date: 2009-10-01

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