An sS Model with Adverse Selection

  title={An sS Model with Adverse Selection},
  author={Christopher L. House and J Leahy},
We present a model of the market for a used durable in which agents face fixed costs of adjustment, the magnitude of which depends on the degree of adverse selection in the secondary market. We find that, unlike typical models, the sS bands in our model contract as the variance of the shock increases. We also analyze a dynamic version of the model in which agents are allowed to make decisions that are conditional on the age of the durable. We find that, as the durable ages, the lemons problem… CONTINUE READING
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