We present a dynamic model of adverse selection to examine the interactions between new and used goods markets. We find that the used market never shuts down, the volume of trade can be large, and distortions are lower than previously thought. New cars prices can be higher under adverse selection than in its absence. An extension to several brands that differ in reliability leads to testable predictions of the effects of adverse selection. Unreliable brands have steeper price declines and lower volumes of trade. We contrast these predictions with those of a model where brands physically depreciate at different rates.

Does the Secondary Life Insurance Market Threaten Dynamic Insurance? by Glenn Daily, Igal Hendel and Alessandro Lizzeri. Published in volume 98, issue 2, pages 151-56 of American Economic Review, May 2008

We study dynamic monopoly pricing of storable goods in an environment where demand changes over time. The literature on durables has focused on incentives to delay purchases. Our analysis focuses on a different intertemporal demand incentive. The key force on the consumer side is advance purchases or stockpiling. In the case of storable goods, the stockpiling motive has recently been documented empirically. We show that, in this environment, if the monopolist cannot commit, then prices are higher in all periods, and social welfare is lower, than in the case in which the monopolist can commit. This is in contrast with the analysis in the literature on the Coase conjecture.

Many countries have recently enacted or proposed reforms aimed at increasing citizens’ information on the quality of some public sector services. Disclosure of schools’and teachers’ quality is the case that has generated the biggest public debate. In the US, the No Child Left Behind Act (NCLB) requires learning progress to be measured for every child and results from students’tests be made available in annual report cards, so that parents can evaluate schools’ performances. Similar reforms have also been proposed for many other public services. In the UK, legislation introduced in the year 2000 now requires that the performance of each Local Government is reviewed and made public with regards to provision of services such as …re, police, housing, social services and education, but also like the condition of roads, the average time taken to remove ‡y-tips and the amount of household waste recycled. 1 By and large, most of these reforms have been opposed by the public sector employees a¤ected. In the US, the largest teachers union- the National Education Association- spent more than $8 million in an e¤ort to derail NCLB. In the UK, public service unions greeted reforms with increased scepticism and ultimately hostility. More generally, it is di ¢ cult to …nd groups of public sector workers or trade unions lobbying the government to disclose more information about quality. Moreover, in contrast with the private sector, it is much less common to see even the highest quality providers (hospitals, schools,....) trying to

Politicians who care about the spoils of office may underprovide a public good because its benefits cannot be targeted to voters as easily as pork-barrel spending. We compare a winner-take-all system—where all the spoils go to the winner—to a proportional system—where the spoils of office are split among candidates proportionally to their share of the vote. In a winner-take-all system the public good is provided less often than in a proportional system when the public good is particularly desirable. We then consider the electoral college system and show that it is particularly subject to this inefficiency.

Behavioral economics presents a “paternalistic” rationale for benevolent government intervention. This paper presents a model of public debt where voters have self-control problems and attempt to commit using illiquid assets. In equilibrium, government accumulates debt to respond to individuals' desire to undo their commitments, which leads individuals to rebalance their portfolio, in turn feeding into a demand for further debt accumulation. As a consequence, (i) large (and distortionary) government debt accumulation occurs, and (ii) banning illiquid assets could improve individuals' welfare. These results offer a new rationale for balanced budget rules in constitutions to restrain governments' responses to voters' self-control problems.

This paper presents a dynamic equilibrium model of a taxi market. The model is estimated using data from New York City yellow cabs. Two salient features by which most taxi markets deviate from the efficient market ideal are, first, matching frictions created by the need for both market sides to physically search for trading partners, and second, regulatory limitations to entry. To assess the importance of these features, we use the model to simulate the effect of changes in entry, alternative matching technologies, and different market density. We use the geographical features of the matching process to back out unobserved demand through a matching simulation. The matching function exhibits increasing returns to scale, which is important to understand the impact of changes in this market and has welfare implications. For instance, although alternative dispatch platforms can be more efficient than street-hailing, platform competition is harmful because it reduces effective density.

Quantitatively, we investigate the allocative and welfare effects of secondary markets for cars. An important source of gains from trade in these markets is the heterogeneity in the willingness to pay for higher-quality (newer) goods, but transaction costs are an impediment to instantaneous trade. Calibration of the model successfully matches several aggregate features of the US and French used-car markets. Counterfactual analyses show that transaction costs have a large effect on volume of trade, allocations, and the primary market. Aggregate effects on consumer surplus and welfare are relatively small, but the effect on lower-valuation households can be large.