Sunday, October 23, 2005

The Market for Katrina Lemons

Hurricane Katrina will offer an excellent test of George Akerlof’s work on adverse selection in the used car market. Over 500,000 vehicles in the New Orleans area were flooded. Used car buyers beware! You may be purchasing a “biohazard”. What will be the equilibrium?

The New York Times reports:

“Since the hurricane struck on Aug. 29, auto clubs and law enforcement officials have warned consumers to scrutinize used cars for water damage and investigate their histories. Because a damaged car's title can be "washed"- varying state laws make it relatively easy to obtain a clean title in one state for a vehicle branded with a "flood" or "salvage" title in another - such warnings are routine after major storms.

But Katrina's automotive losses were hardly routine. Cars that sat in sewage- and fuel-contaminated floodwaters in New Orleans could pose unprecedented risks to anyone who handles the vehicles or their parts, according to the Coordinating Committee for Automotive Repair, a nonprofit organization that provides advice on pollution prevention and worker health and safety issues to segments of the auto industry, including repair businesses. “

AS ALL ECONOMISTS KNOW, the adverse selection problem arises due to asymmetric information. Information technology is “leveling the playing field”.
Consumers can research whether a vehicle was ever registered in counties declared a federal emergency disaster area by entering the VIN at At the Web site of the National Insurance Crime Bureau,, one can enter a car's 17-digit vehicle identification number, or VIN, to find out whether it is among the 60,000 listed so far in a database of vehicles damaged by Hurricanes Katrina or Rita.

Its interesting to contrast homes and cars. The soggy homes cannot be cheaply exported and sold on the national market while the cars can be.