Adverse Selection in the Used Car Market: Evidence from Purchase and Repair Patterns in the Consumer Expenditure Survey

Jonathan Peterson, HSE Moscow
Henry S. Schneider, Cornell University

Abstract

We analyze adverse selection in the used car market using a new approach that treats a car as having some parts with symmetric information and others with asymmetric information. Using Consumer Expenditure Survey and Consumer Reports data, we find adverse selection corresponding to the engine, transmission, and, during colder months, air conditioning. We find sorting corresponding to the vehicle body, and, during warmer months, air conditioning. Adverse selection moderately reduces trade volume and quality in the secondhand market, and appears to be driven primarily by transitory as opposed to permanent aspects of quality.