The effect of information on market activity; evidence from vehicle recalls - I. M. Van den Bijgaart; Davide Cerruti (ETH Zurich, CER-ETH - Center of Economic Research, 2020)
We evaluate the effect of vehicle recalls on vehicle transactions in the second-hand market. Using a rich dataset of Dutch vehicle registrations, we exploit the quasi-experimental variation in recalls across nearly-identical cars. We find strong heterogeneities across market segment: vehicles with a lower (higher) list price or some (zero) defects experience an increase (decrease) in transactions after a recall. Based on our theoretical model, this suggests that recalls increase sorting in low-end markets, yet exacerbate adverse selection in high-end markets. Our results shed light on the effect of information arrival in markets subject to uncertainty and information asymmetries.
Keywords: D12; D83; L15; L62; 330; vehicles; recalls; adverse selection; sorting; information