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The Role and Growth of New-Car Leasing: Theory and Evidence

Author

Listed:
  • Justin P. Johnson
  • Henry S. Schneider
  • Michael Waldman
Abstract
There has been substantial growth in rates of new-car leasing over the last few decades. Building on recent theoretical research, we construct a model of the leasing decision in which leasing mitigates adverse selection and reduces transaction costs, but moral hazard limits its use. In our model, the prevalence of leasing is related to new-car reliability, which suggests that the recent growth in leasing is at least partly due to improvements in new-car reliability. We use this model to derive testable implications and then conduct an empirical analysis to investigate whether the operation of the new- and used-car markets is consistent with the predictions of this theoretical approach. Our empirical results support the theoretical predictions of our model. In particular, we provide direct evidence that leasing mitigates adverse selection and that an important factor in the growth in new-car leasing rates has indeed been the growth of new-car reliability.

Suggested Citation

  • Justin P. Johnson & Henry S. Schneider & Michael Waldman, 2014. "The Role and Growth of New-Car Leasing: Theory and Evidence," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 665-698.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/679338
    DOI: 10.1086/679338
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    References listed on IDEAS

    as
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    Cited by:

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    2. Bourjade, Sylvain & Muller-Vibes, Catherine, 2023. "Optimal leasing and airlines' cost efficiency: A stochastic frontier analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 176(C).
    3. Biyalogorsky, Eyal & Heiman, Amir & Muller, Eitan, 2022. "The differential effects of time and usage on the brand premiums of automobiles," International Journal of Research in Marketing, Elsevier, vol. 39(1), pages 212-226.
    4. Strittmatter, Anthony & Lechner, Michael, 2020. "Sorting in the used-car market after the Volkswagen emission scandal," Journal of Environmental Economics and Management, Elsevier, vol. 101(C).
    5. Jonathan R. Peterson & Henry S. Schneider, 2017. "Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting," Management Science, INFORMS, vol. 63(9), pages 3111-3127, September.
    6. Weichselbaumer, Michael, 2023. "Unobserved heterogeneity and adjustment to behavioral bias: The case of used cars," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    7. Weisburd, Sarit & Bird, Daniel & Ben-Porath, Ronny, 2018. "Adverse Selection and Moral Hazard in the Leasing Market: Are Buybacks the Solution?," CEPR Discussion Papers 12633, C.E.P.R. Discussion Papers.

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