Sorting on the Used-Car Market After the Volkswagen Emission Scandal

TL;DR

This paper examines how the VW emission scandal affected the used-car market, revealing increased supply of VW diesel cars and decreased prices for vehicles with higher manipulation probability, using market data and a sorting model.

Contribution

It provides new empirical evidence on market reactions to environmental scandals and introduces a model explaining sorting based on environmental quality of used cars.

Findings

Supply of VW diesel cars increased post-scandal

Prices for cars with high manipulation probability decreased

Market response correlated with likelihood of emission manipulation

Abstract

The disclosure of the VW emission manipulation scandal caused a quasi-experimental market shock to the observable environmental quality of VW diesel vehicles. To investigate the market reaction to this shock, we collect data from a used-car online advertisement platform. We find that the supply of used VW diesel vehicles increases after the VW emission scandal. The positive supply side effects increase with the probability of manipulation. Furthermore, we find negative impacts on the asking prices of used cars subject to a high probability of manipulation. We rationalize these findings with a model for sorting by the environmental quality of used cars.