Review of Industrial Organization 23: 65–83, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
Moral Hazard and the Market for Used
WAYNE R. DUNHAM
Economic Analysis Group, Antitrust Division, U.S. Department of Justice, 600 E Street, N.W., Suite
10000, Washington D.C. 20530, U.S.A.
Abstract. I examine a moral hazard problem faced by the owners of ﬂeet automobiles. Because
ﬂeet vehicles are generally not driven by their owners, the drivers of these vehicles do not bear all of
the costs of either neglecting or abusing the vehicle, causing these vehicles to depreciate faster than
owner-operated vehicles. Empirical estimates show that, after controlling for mileage, ﬂeet vehicles
depreciate approximately ten to thirteen percent faster per-year than owner-driven vehicles. I argue
that at least part of this increased depreciation is attributable to moral hazard.
Key words: Auction, automobile depreciation, moral hazard
This paper introduces a model of moral hazard in the use of ﬂeet vehicles such as
corporate-owned business ﬂeet vehicles or rental vehicles and tests the empirical
implications of that model using auction price data. The separation of ownership
and control of a ﬂeet vehicle causes informational asymmetries as the owner of the
ﬂeet vehicle cannot directly observe how a driver treats that vehicle. While driver
mistreatment may not be immediately obvious, continual mistreatment (possibly
by a series of drivers) may be detectable. This implies that it is possible to test for
moral hazard, not by looking at the actions of the driver of the ﬂeet vehicle, but
rather by how that driver’s hidden actions affect the ﬂeet vehicle’s residual value in
the used car market.
In the model introduced below it is assumed that there are two ways to reduce
the depreciation rate of a vehicle; improved driver care and improved owner care
(maintenance). Because the driver of a ﬂeet vehicle is not the residual claimant to
its resale value, that driver will use a less than optimal level of driver care (assuming
driver care is costly). If driver care and maintenance are substitutes, then the ﬂeet
owner will increase the level of maintenance in response to this decrease in driver
However, this increase in the level of maintenance will not be large enough
Obviously, if driver care and maintenance are complements, the decrease in driver care causes
a decrease in maintenance, ensuring an increase in depreciation.