A Quantitative Analysis of the Used Car Market

We quantitatively investigate the allocative and welfare effects of secondary markets for cars. Gains from trade in these markets arise because of heterogeneity in the willingness to pay for higher-quality (i.e., newer) goods, but transaction costs are an impediment to instantaneous trade. We explore how the income distribution affects this heterogeneity---income is an important determinant of willingness to pay for quality. Calibration of the model matches several aggregate features of U.S. and French used-car markets well. Counterfactual analyses show that transaction costs have a large effect on volume of trade, allocations, and the primary market, but small effects on consumer surplus and welfare.