Lemons and certified pre-owned cars in the used car market

Abstract

I use a modified version of Bond (1982) lemon model to test the quality of certified pre-owned (CPO) and noncertified pre-owned (nonCPO) cars. I use a Tobit model to deal with the censoring problem in the data and apply sensitivity analysis to check the robustness of the coefficients. The data is collected from ‘The Panel Study of Income Dynamics (PSID)’ from the University of Michigan for this study. The results show that nonCPO cars required more maintenance expenditures than CPO cars of a similar age, which means that the CPO cars are of better quality. The study also implies that the institutions of leasing and certification have substantially improved, which in turn, have contributed to reducing adverse selection and improved the average quality of traded cars in the used car market.

Notes

¹ For details see Automotive News, Industry Trade Reports and The Used Car Market Report 2003 by Manheim Auctions.

² For details see the following websites: http://www.kbb.com; http://www.endmunds.com; http://www.jdpower.com; http://www.polk.com; and http://www.nvo.com/cnwmr/

³ According to a study by Polk Corporation, durability of cars has increased in the past two decades. It is reflected by the fact that median age of car in 1970 was 4.9 years, and 8.1 in 2001. Moreover, a study by CNW Marketing/Research reflects that frequency of defects reported by owner or lessee for every brand of cars has dropped dramatically. For example, frequency index of defects in 1990 for GM, Ford, Chrysler, Toyota and Honda was 11.4, 13.8, 16.1, 8.8 and 8.1, respectively, and in 2002 it dropped respectively to 9.3, 10.9, 12.7, 5.2 and 5.9.

⁴ These results are not reported to save the space, but available upon request for the authors.

⁵ Again we did not report these results here to save space.