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WP201927-Durables-and-lemons-private-information-and-the-market-for-cars.pdf

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We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.

    Authors

    Richard Blundell
    Richard Blundell

    CPP Co-Director

    Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.

    Hamish Low
    Hamish Low

    Research Fellow University of Oxford

    Hamish is the James Meade Professor of Economics at the University of Oxford, a Professorial Fellow of Nuffield College and a Research Fellow at IFS.

    Costas Meghir
    Costas Meghir

    Research Fellow Yale University

    Costas is a Research Fellow of the IFS and a Professor of Economics at Yale University and a Visiting Professor at University College London.

    Ran Gu
    Ran Gu

    Research Associate University of Essex

    Ran is an IFS Research Associate and a Lecturer at the University of Essex interested in understanding household and firm behaviour.

    Søren Leth Petersen
    Søren Leth-Petersen

    Research Fellow University of Copenhagen

    Søren is a Professor of Economics and Deputy Director of Centre for Economic Behaviour and Inequality (CEBI) at the University of Copenhagen.

    Working Paper details

    DOI
    10.1920/wp.ifs.2019.1927
    Publisher
    The IFS

    Suggested citation

    Blundell, R et al. (2019). Durables and lemons: private information and the market for cars. London: The IFS. Available at: https://ifs.org.uk/publications/durables-and-lemons-private-information-and-market-cars (accessed: 21 May 2025).

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