Unobserved heterogeneity and adjustment to behavioral bias: The case of used cars

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.