Can You Judge a Car by Its History? Vehicle History Reports and the Efficiency of the Used-Car Retail Market

Abstract

This paper examines how the provision of free Vehicle History Reports (VHRs) by dealers impacts the extent of adverse selection, the transaction efficiency, and the quality of the match between buyers and cars in the used-car retail market. It exploits a novel panel data set of used-car listings and the availability of free VHRs for each car. It uses observations from dealers who made complete (rather than partial) shifts in their VHR provision policies as well as the VHRs of all cars, whether or not they were provided for free to identify the causal impacts of the provision and the information content of the VHRs. We find that the availability of free VHRs leads to a significant increase in the list price-VHR content correlation, an average reduction of 5.5 days (14%) in the time that dealers take to sell a car, and a significantly smaller likelihood that the buyer resells a car within a year after purchase. Overall, these findings suggest that consumers can learn about the latent quality of used cars from both explicit information (such as accident records) and implicit information (in particular, ownership history) contained in VHRs. The availability of free VHRs mitigates adverse selection and improves the efficiency of the used-car retail market.