Does Information Asymmetry Matter? Buyer Behavior in the Online Used Car Market in Developing Economies.

Abstract:

Online trade in used products has grown dramatically in developing economies even as these markets suffer from well-documented information problems. In the absence of enforceable contracts between sellers and buyers, this growth may generate market inefficiencies through adverse selection. This paper examines why the volume of online used car transactions continues to rise despite the presence of information asymmetry, using secondary data on 125 Toyota vehicles cleared through Toyota Tanzania Limited from September to October 2017. Regression results show that car characteristics (mileage, age, drive type, and number of doors) and seller characteristics (seller remarks and customer feedback) significantly influence consumer behavior in the online used car market. Because online trading in developing economies is expanding rapidly and may produce adverse selection when not regulated, we recommend that relevant institutions enforce information disclosure requirements for sellers, binding them to the information they post online. Such regulation would reduce information asymmetry and support the continued growth and efficiency of online markets in developing countries.