Adverse selection in durable goods markets

We present a dynamic model of adverse selection to examine the interactions between new and used goods markets. We find that the used market never shu ts down, the volume of trade can be large, and distortions are lower than p reviously thought. New cars prices can be higher under adverse selection th an in its absence. An extension to several brands that differ in reliabilit y leads to testable predictions of the effects of adverse selection. Unreli able brands have steeper price declines and lower volumes of trade. We cont rast these predictions with those of a model where brands physically deprec iate at different rates. (JEL D82, L15).