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Leasing, Lemons, and Buybacks

Justin P. Johnson and Michael Waldman
The RAND Journal of Economics
Vol. 34, No. 2 (Summer, 2003), pp. 247-265
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/1593716
Page Count: 19
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Leasing, Lemons, and Buybacks
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Abstract

In his seminal article of 1970, Akerlof argued that the used-car market is not efficient because adverse selection causes too little trade. We construct a competitive model of the new- and used-car markets and investigate the relationship between new-car leasing and adverse selection. Our analysis yields a number of interesting results, including that new-car leasing reduces the adverse-selection problem, and that buybacks also increase efficiency in the secondhand market. We also discuss alternative explanations for new-car leasing and an explanation for the growth in new-car leasing during the last fifteen years.

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