Durables and Lemons: Private Information and the Market for Cars

Private information on car quality means the sale price reflects the average quality of cars sold, which can be lower than the average quality in the population. This difference is the lemons penalty imposed on holders of high-quality cars. The authors estimate the evolution of the lemons penalty through an equilibrium model of car ownership with private information using Danish linked registry data on car ownership, income, and wealth. They examine the aggregate implications and distributional consequences of these penalties, finding that the penalty is largest early in ownership, declines with ownership duration, reduces transaction volumes and car turnover, and weakens the self-insurance role of cars, though the market does not collapse because income shocks induce sales.