Avoiding Lemons in Search of Peaches: Designing Information Provision

Avoiding Lemons in Search of Peaches: Designing Information Provision

By Pedro M. Gardete, Megan Hunter
June 2018Working Paper No. 3669

This paper develops a search model for alternatives with multiple characteristics, and reports estimation results in the context of an online used car dealer. The model allows search over alternatives with multiple characteristics with arbitrary marginal distributions and correlation structures. For example, more expensive vehicles may feature fewer past owners, and vehicles with higher mileage may reveal more issues in their inspection reports. The model also allows for a rich set of consumer search behaviors, including (but not limited to) sequential search within vehicles and characteristic-by-characteristic search across. The estimated model is then used to consider different information design policies by the seller. We find that the choice of the characteristics to be made available to consumers upfront has significant economic implications. For example, featuring variance-reducing information upfront (in our application, vehicle histories) instead of other characteristics translates into an approximate conversion rate increase of 20%, in relative terms. In light of our results, we provide intuition on which characteristics should be disclosed by the seller, and which characteristics consumers should be required to search. Additional counterfactual analyses confirm our intuition. Finally, we show that a simplified approach based on traditional choice models would produce low quality recommendations about the best information design policies.