Tuesday, August 9, 2011

Why has new car leasing grown so dramatically?

In the early 1980s consumer leasing of new cars was almost unheard of, but now roughly one-fourth of new cars are leased. Why has new-car leasing grown so dramatically? An economist has the answer:

Buying new, and then selling a used car exposes the seller to the costs of adverse selection:  since car buyers have worse information about the quality of a used car than does the seller, buyers rationally expect that lower quality used cars will be offered for re-sale.  The result is lower prices.  So sellers suffer a low price when they go to sell a used car.

Leasing has its own problems, both adverse selection and moral hazard:
a leased unit will be inadequately maintained because there is high probability that the consumer will return the unit to the lessor at the end of the lease contract. .... moral hazard also applies to units that are purchased when new because maintenance expenditures are not reflected in the price for which used units sell on the secondhand market.  
But provisions in the leasing contract specifying that repairs be done on problems identified during routine maintenance mitigates the costs of both these problems.  In fact, leased used cars command premium prices over non-leased used cars.

The paper provides explanations for why leasing has become more popular over time:  since the proportion of problems identified during routine maintenance has risen over time, the advantage of using leasing over buying has also risen.


  1. It is true that the seller imposed himself on selling the unit in lower price than the usual. Car leasing, on the other hand, gives the chance to the one who leases to use the car and maintain to use it without the hassle of paying it fully. I agree that the inspection of the cars is also important to know the previous problems of the car.

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  3. Everyone loves a new car but not everybody can allow a new ride. Aswell it is actual harder to accumulate a new car attending like new as anyone ability just blemish your ride.

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  4. Leasing is good when you are in mood of trying new cars and do not want to stick with one for your whole life, Car Lease is not good for people who are not careful in maintenance and handling of cars

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