Is an Automaker's Road to Bankruptcy Paved with Customers' Beliefs?
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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Volume (Year): 101 (2011)
Issue (Month): 3 (May)
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- 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.
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- Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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