Efficient Sorting in a Dynamic Adverse Selection Model: The Hot Potato

We study the possibility of achieving efficiency in a dynamic adverse selection market for durable goods. The idea is to use the number of times a car has been traded (``vintage'') as a signal of its quality. Higher-valuation consumers experiment with younger vintages. <br> We first exhibit an impossibility result: no choice of (re)sale prices can induce consumers to follow this experimentation policy. <br> We then show that modified leasing contracts can be constructed so as to achieve efficiency if consumers are patient.