…the empirical analysis finds that cars that were acquired used required no more maintenance expenditures than those that were acquired new of a similar age.
Here is the link, here is the published version, hat tip is from Division of Labor, and here is Alex’s previous post on adverse selection more generally.
But isn’t there a censoring problem, in that markets affected by the lemons problem don’t exist, while those that do, have solved the problem?
>> How does he solve for one variable with 1 equation and 5 unknowns?
That is the magic of economerics. You are better off not knowing it.
The problem with used car pricing is as much one of information asymmetry as one of actual quality. The seller knows if his car has a cracked frame and the buyer doesn’t. The seller knows the true mileage (if it was dialed back) and the buyer doesn’t. The distribution of problems and mileage may well be identical between the cars purchased used and those purchased new of the same age. But the used car may have issues or mileage unknown to the buyer. That’s why a car loses so much value as soon as it is driven off the lot. In fact, a buyer of a car that’s one month old may well have more cause to be suspicious.
Unless of course the warranty is an unnecessary expense.
What are the odds, after all, that a nearly new Honda will need to go to the shop in two years?
It would be worth it for some people to gamble 4684 or even 1500 against the probability that an 06 Accord would have non-routine maintenance expense greater than the savings in a 2 year period.
Obviously CPOs are one way to deal with the lemon problem, but why would leasing have anything to do with the lemon problem?
In my life I have bought four cars from rental companies and have been quite satisfied with every one. By the way they wash rental cars every time they are turned in so they are probably washed more often than other cars.
Phil – If the car was in accident. I had a car that got t-boned ahead of the front wheel and the fix required removing the engine. The body shop did a piss poor job. They didn’t attach a coolant hose properly and it leaked all its coolant. They also overfilled the A/C causing it to fail. They also didn’t seem to do a good job reattaching the electrical as some gremlins popped up.
Phil, The other concern I would have is a marjor component failure. Given the issues the body shop had with taking out the engine and putting it back in – if a car serious engine damage, due to timing belt failure, coolant loss, loss of oil etc, oil sludge, etc. and it required major repair work I would worry. I can only imagine the billions of dollars and countless hours that went into the process enginering that ensures the Accords are manufactured properly at the factory. I would imagine the same attention to detail isn’t present at your average Honda dealer service department.
Gee. $31.50 to buy a copy.
As the man in the Miller commercial says, “You people must be crazy.”
Wonder how many they sell.
In Venezuela used car from the 70 and 80s are sold at higher price than new cars.
A 79 malibu a ” regulated” car that is a car with only the basic with a price fixed by the government were until 2 or 3 years ago the most valued car in the country.Ltd ( 78 or older), Caprice 80 and 81 ( the 80 model is more expensive than the 81)and Fairline 78 were used for passenger transportation until the government banned them in 2004. A 1990 corolla sells by 1/3 of the value of a 2008 model
The question he asks cannot, no matter what answer he gets, contradict the lemons model. In fact, one could as well argue that his econometric result is evidence in favor of the lemons model.
Reason:
1.) Under a severe lemons problem, it is easy to imagine, that the only used cars that are sold are the impeccable ones. If your car has even the most minor defect you cannot sell. Then the maintenance expenditures will be much lower for used cars.
2.) People have a different propensity to sell their car. There are people who get a new car every year, no matter what. Maybe these people also treat their cars differently.
Didn’t read the paper since I’m not going to blow money on it. It occurs to me, however, that the same folks who are likely to buy a new a car are also likely to have uneconomic repairs done.
For instance, people like me who typically buy 6-8 year old vehicles with 100K miles in a model with a good CU repair record, are far less likely to have things fixed which are minor inconveniences. Whereas, a party who bought that car new but does not sell it, seems far more likely to have that ding taken out of the door, the weatherstripping replaced, the cracked dashboard replaced, the transmission that has to be babied between 1st and 2nd replaced, etc. You are comparing the repair records for two populations where the car is not the only differentiated variable, the car owner is self-selected as either free-spending (new car buyer) or value-driven (used car purchaser).
Just out of interest, does anyone know of an empirical study that does show a real life example of the lemon model, i.e. high quality products are sold for the same price as low quality products because differentiation is hard?
Anyway lemon cars are all about problems.So I don’t have any argue to share with you people.
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