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Prof. Alessandro Gavazza of London School of Economics on mortgages, cars and market friction

Scientific Sense ®

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How Does Durability Fit Into a Decision Process?

Many consumers who buy a new car keep it for a short, reasonably short period relative to the useful lifetime of a car. So in the US, more or less cars, let's assume the cars last about 15 years. But if you look at, there are lots of cars that trade right after three years. And then there is a tradition, your lower income consumer that buys this three year old car and keeps it for about five years. The car is high quality when it's new, then it depreciates. Then there is an even lower income consumer who drives it until it scraps it. A car basically has three for owners, if not more.

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