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| Author: | Hendel, I. Lizzeri, A. |
| Title: | The Role of Leasing under Adverse Selection |
| Journal: | Journal of Political Economy
2002 : FEB, VOL. 110:1, p. 113-143 |
| Index terms: | LEASING ADVERSE SELECTION POLITICAL ECONOMY |
| Language: | eng |
| Abstract: | Leasing contracts are extensively used in durable goods markets. These contracts specify a rental rale and an option price at which the used good can be bought on termination of the lease. This option price cannot be controlled when the car is sold. The authors show that in a world in which quality is observable, this additional control variable is ineffective. Under adverse selection instead, leasing contracts affect equilibrium allocations in a way that matches observed behavior in the car market. Consistent with the data, the authors' model predicts that leased cars have a higher turnover and that off-lease used cars are of higher quality. Moreover, the model predicts that the recent increase in leasing can be explained by the observed increase in car durability. |
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