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American Economic Review: Vol. 101 No. 3 (May 2011)

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

Article Citation

Hortaçsu, Ali, Gregor Matvos, Chaehee Shin, Chad Syverson, and Sriram Venkataraman. 2011. "Is an Automaker's Road to Bankruptcy Paved with Customers' Beliefs?." American Economic Review, 101(3): 93-97.

DOI: 10.1257/aer.101.3.93

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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Authors

Hortaçsu, Ali (U Chicago)
Matvos, Gregor (U Chicago)
Shin, Chaehee (U Chicago)
Syverson, Chad (U Chicago)
Venkataraman, Sriram (Emory U)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G33: Bankruptcy; Liquidation
L25: Firm Performance: Size, Diversification, and Scope
L62: Automobiles; Other Transportation Equipment


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