Remedies to the Lemons Problem. Warranties. Warranties. Remedies to the Lemons Problem. Warranties and Moral Hazard

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1 Lectures in Microeconomics-Charles W. Upton Warranties You are selling used cars People worry about lemons Warranties You are selling used cars People worry about lemons Provide a warranty! Warranties and Moral Hazard However, warranties also create moral hazards. What incentives does the buyer have to maintain the car? Why should a buyer change the oil with a 100,000 mile warranty?

2 Take a used car to a mechanic for testing Reputation. Reputation Buy a used car from a new car dealer Reputation Buy a used car from a new car dealer Buy from a close friend or relative Advertising Advertising promotes reputation.. Advertising Advertising promotes reputation. Bad stories ruin the reputation of advertised products. Thus you advertise only quality products.

3 Advertising Advertising promotes reputation. Bad stories ruin the reputation of advertised products. Thus you advertise only quality products. Advertising has a cumulative effect on demand. Much advertising doesn t make sense if the dealer does not intend to stay in business. Economists stress the importance of the law as a remedy Suppose you sell me a car without oil in the tank and save $20. Suppose you sell me a car without oil in the tank and save $20. If you disclose and I don t fill, I am out of luck If you don t disclose, you are liable.

4 Are Trucks Lemons? Year New Used

5 Are Trucks Lemons? Year New Used If they are, why aren t these numbers radically different? End 2004 Charles W. Upton

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