24 March 2026
Can You Sell a Good Used Car? Evidence from the Danish Car Market
Can You Sell a Good Used Car?
Evidence from the Danish Car Market
Richard Blundell, Ran Gu, Søren Leth-Petersen, Hamish Low, Costas Meghir
A lemon rots from the inside. It may look flawless on the outside, but once you cut it open, it turns out to be bad. That’s why a bad second-hand car is called a “lemon”: it may be polished up for sale, but underneath it’s worn down, rusty, and unreliable. In his classic paper, George Akerlof showed how such hidden information can break markets: if buyers can’t tell good cars from bad, they won’t pay full price—so only the worst cars get sold. But how big is this problem in real life? In a new study, Blundell, Gu, Leth-Petersen, Low, Meghir (2026), we use rich Danish data to test the theory in the second-hand car market.
What We Do
In our paper “Durables and Lemons: Private Information and the Market for Cars”, recently published in Quantitative Economics, we use comprehensive administrative data covering all cars and households in Denmark over nearly two decades. This allows us to observe when people buy and sell cars, how long they own them, and how their financial situation evolves over time. We estimate a life-cycle model in which households face income shocks and credit constraints, and where only sellers know the true condition of their car.
What We Find
• Even good cars sell at a discount because buyers can’t tell them apart from bad ones. This discount, the lemons penalty, is largest in the first year of ownership: sellers lose around 12% of the purchase price, on top of normal depreciation of 19%.
• The penalty fades over time. After two years of ownership, the lemons penalty drops to about 6%, and it shrinks to near zero after 8–9 years, when any hidden flaws are likely obvious.
• The market does not collapse. Despite asymmetric information, many people still sell good cars. Income shocks push people to sell — often because they need cash —
which helps sustain the market.
• But the lemons problem still matters. It reduces car turnover, slows down upgrades, and limits the ability of households—especially those with limited savings—to use cars as financial buffers.
Why It Matters
For many low-wealth households, a car is one of the largest assets they own. But because of the lemons problem, it is not always the safety net they need. Selling a car during hard times comes at a cost, weakening the car’s role as a tool for smoothing income shocks—especially when access to credit is limited. Interestingly, the findings suggest that the lemons penalty becomes smaller during recessions, when more people are forced to sell high-quality cars, improving the average quality on offer.
Broader Implications
These findings highlight the real-world impact of asymmetric information in markets for durable goods. Private information—not just transaction costs like registration fees—can create inefficiencies and shift who gains or loses. Owners of good cars are penalized, while those selling lemons benefit from pooled pricing.
Beyond cars, these insights apply to other markets for second-hand goods, and they matter for how we think about consumer resilience, credit design, and inequality.
Blundell, R., Gu, R., Leth-Petersen, S., Low, H. and Meghir, C. (2026), Durables and lemons: Private information and the market for cars. Quantitative Economics, 17: 38-91. https://doi.org/10.3982/QE1822
You can read the research paper here