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.