ABSTRACT
We study how statutory-law changes relate to disclosure, pricing, and liquidity in the used-car market. Federal odometer laws mandated disclosure of mileage on car titles upon ownership transfer and thereby enhanced enforcement of odometer-fraud prohibitions. Exploiting time variations in state implementation of odometer regulations, we have four key findings. First, the frequency of mileage disclosure in classified ads increases significantly post implementation, suggestive of improved disclosure incentives. Second, the sensitivity of asking price to mileage disclosed increases post implementation, suggesting that laws increased the credibility of information disclosed. Third, we show a 5.8 percent increase in asking price, indicating a reduction of adverse selection. Fourth, we find a decrease in repeated ads, particularly among mileage disclosers – implying that the law improves trade liquidity. Our study highlights the value of laws in enhancing verifiability of disclosed information and market outcomes.
Cho, Chihoon and Frankel, Richard M and Martin, Xiumin, Law and Lemons (October 17, 2019).
First posted 2019-10-27 08:16:56
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