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Is an Automaker's Road to Bankruptcy Paved with Customers' Beliefs?

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  • Ali Hortacsu
  • Gregor Matvos
  • Chaehee Shin
  • Chad Syverson
  • Sriram Venkataraman

Abstract

We explore the role the feedback loop between firms' financial health and consumers' demand for their products plays in the auto market. We construct a simple model of an automaker making pricing and debt service (continuation) decisions while recognizing that consumers are sensitive to whether it stays in business. We show that multiple equilibria can exist in such a model, and calibrate it to match stylized facts surrounding GM's recent bankruptcy. The results suggest that while the impact of financial distress on demand substantially reduced GM's profit, bank-run-like multiple equilibria do not appear likely in this market.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.3.93
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 3 (May)
Pages: 93-97

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:3:p:93-97

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  1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  2. Sriram Venkataraman & Gregor Matvos & Chad Syverson & Business & Business & Ali Hortacsu, 2010. "Are Consumers Affected by Durable Goods Makers’ Financial Distress? The Case of Auto Manufacturers," 2010 Meeting Papers 836, Society for Economic Dynamics.
  3. Hayne E. Leland., 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Research Program in Finance Working Papers RPF-233, University of California at Berkeley.
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