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Leasing, Lemons, and Buybacks

Author

Listed:
  • Johnson, Justin P
  • Waldman, Michael

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. Copyright 2003 by the RAND Corporation.

Suggested Citation

  • Johnson, Justin P & Waldman, Michael, 2003. "Leasing, Lemons, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 247-265, Summer.
    • Handle: RePEc:rje:randje:v:34:y:2003:i:2:p:247-65
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