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Adverse selection in the used-car market: evidence from purchase and repair patterns in the Consumer Expenditure Survey


  • We thank Steve Berry, Justin Johnson, Fiona Scott Morton, Philip Schmidt-Dengler, Michael Waldman, two anonymous referees and the editor, and various seminar participants for helpful comments, and Romana Primus of Whaling City Ford, Paul Trembley of East Rock Auto Repair, George Iny of the Automobile Protection Association, and Eli Melnick of Start Auto Electric for background information about the used-car and car-repair markets.


We analyze adverse selection in the used-car market using a new approach that considers a car as an assemblage of parts, some with symmetric information and others with asymmetric information. Using data from the Consumer Expenditure Survey and Consumer Reports, we examine turnover and repair patterns. We find evidence of adverse selection due to the conditions of the transmission, engine, and, during colder months, air-conditioning; and sorting due to the conditions of the vehicle body and, during warmer months, air-conditioning. Our quantification exercises indicate that adverse selection may have a meaningful effect on trade volume and quality in the secondhand market.

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