Unobserved heterogeneity and adjustment to behavioral bias: The case of used cars |
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| Institution: | 1. Dipartimento di Economia e Finanza, Catholic University of Milan, Via Necchi 5, 20123 Milano, Italy;2. Dipartimento di Matematica per le Scienze Economiche, Finanziarie ed Attuariali, Catholic University of Milan, Largo Gemelli 1, Milano 20123, Italy;1. Institut Polytechnique de Paris, Telecom Paris, Department of Economics and Social Sciences, 19 Place Marguerite Perey, 91120 Palaiseau, France & University of Cape Town, School of Economics, Rondebosch, 7701, Cape Town, South Africa;2. Deloitte Finance, 6 Place de La Pyramide Tour Majunga Deloitte, 92800, Puteaux, France;1. Department of Economic Sciences, Sapientia Hungarian University of Transylvania, Piata Libertatii 1, Miercurea Ciuc 530104, Romania;2. Department of Business Sciences, Sapientia Hungarian University of Transylvania, Piata Libertatii 1, Miercurea Ciuc 530104, Romania;1. Uber Technologies, Inc., USA;2. Department of Economics, Eller College of Management, University of Arizona, Tucson, AZ, USA |
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| Abstract: | With novel data on ex-post quality after used-car purchases, I evaluate left-digit bias, a type of inattention bias, for underlying quality of used cars. My main result is that the used-car market exhibits a quality discontinuity in parallel to a price discontinuity at 10,000 multiples of mileage. I discuss explanations for how quality adjusts to the price discontinuity. The explanations differentiate between exogenous and endogenous quality, and by the extent of the information asymmetry about quality. Quality assurance mechanisms, like used-car knowledge, trust, or recommendations, can reduce information asymmetry. Additional evidence on quality assurance shows that buyers use much more information — both before and after the purchase — than the pure inattention interpretation of left-digit-bias would suggest. |
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