An sS Model with Adverse Selection

We present a model of the market for a used durable in which agents face ...xed costs of adjustment, the magnitude of which depends on the degree of adverse selection in the secondary market. We ...nd that, unlike typical models, the sS bands in our model contract as the variance of the shock process increases. We also analyze a dynamic version of the model in which agents are allowed to make decisions that are conditional on the age of the durable. We ...nd that, as the durable ages, the lemons problem tends to decline in importance, and the sS bands contract.