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

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Listed:
  • 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.

Suggested Citation

  • Ali Hortacsu & Gregor Matvos & Chaehee Shin & Chad Syverson & Sriram Venkataraman, 2011. "Is an Automaker's Road to Bankruptcy Paved with Customers' Beliefs?," American Economic Review, American Economic Association, vol. 101(3), pages 93-97, May.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:3:p:93-97
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.3.93
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    References listed on IDEAS

    as
    1. 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.
    2. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
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    Cited by:

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    2. Albertazzi, Ugo & Burlon, Lorenzo & Pavanini, Nicola & Jankauskas, Tomas, 2020. "The (unobservable) value of central bank’s refinancing operations," Working Paper Series 2480, European Central Bank.
    3. John R. Birge & Rodney P. Parker & Michelle Xiao Wu & S. Alex Yang, 2017. "When Customers Anticipate Liquidation Sales: Managing Operations Under Financial Distress," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 657-673, October.
    4. Feng, Xu & Lütkebohmert, Eva & Xiao, Yajun, 2022. "Wealth management products, banking competition, and stability: Evidence from China," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    5. Tarantino, Emanuele & Pavanini, Nicola & Mayordomo, Sergio, 2020. "The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability," CEPR Discussion Papers 15069, C.E.P.R. Discussion Papers.
    6. Zhao, Lima & Huchzermeier, Arnd, 2019. "Managing supplier financial distress with advance payment discount and purchase order financing," Omega, Elsevier, vol. 88(C), pages 77-90.
    7. Erica L. Plambeck, 2013. "OM Forum —Operations Management Challenges for Some “Cleantech” Firms," Manufacturing & Service Operations Management, INFORMS, vol. 15(4), pages 527-536, October.
    8. Li, Shanjun & Linn, Joshua & Spiller, Elisheba, 2013. "Evaluating “Cash-for-Clunkers”: Program effects on auto sales and the environment," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 175-193.
    9. S. Alex Yang & John R. Birge & Rodney P. Parker, 2015. "The Supply Chain Effects of Bankruptcy," Management Science, INFORMS, vol. 61(10), pages 2320-2338, October.
    10. Plambeck, Erica L., 2012. "Reducing greenhouse gas emissions through operations and supply chain management," Energy Economics, Elsevier, vol. 34(S1), pages 64-74.

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