(Wednesday, 3rd April 2002)
The standard model of adverse selection does not explain why buyers have higher valuations than sellers. When the car market endogenously determines who acts as a buyer or seller, then high valuation agents will buy new cars (and sell in the 2nd hand car market), whereas those with lower valuations buy 2nd hand cars. In this way, the adverse selection problem can be partially circumvented.
Bibliographical references :
Hendel, I. and A. Lizzeri, 1999 "Adverse Selection in Durable Goods Markets" American Economic Review 89(5): 1095-1115.
Hendel, I. and A. Lizzeri, 2001, "The Role of Leasing under Adverse Selection" Journal of Political Economy (forthcoming).