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A model of the used car market with lemons and leasing

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Abstract:

This article extends Kim's (1985) model of the used car market with asymmetric information to examine the possible impacts of leasing and Certified Pre-Owned (CPO) programs on the average quality of traded used cars in the market. The author assumed that a consumer can buy or lease a new car, or he/she can buy a used or a CPO car. While, like Kim (1985), the author assumed that the quality of a car depends on the maintenance level, the maintenance level in this model is chosen when a car is still a 'new' car, i.e. after the warranty ends. The model implied that the average quality of traded used cars can be either higher or lower than the average quality of nontraded used cars. The study also found that leasing and CPO have substantially improved the information mechanism between buyers and sellers of used cars, which, in turn, has helped reduce adverse selection and improved the average quality of traded used cars in the market.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840802314556

Affiliations: Department of Economics, Saginaw Valley State University, Saginaw, MI 48710, USA

Publication date: November 1, 2010

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