Is an Automaker's Road to Bankruptcy Paved with Customers' Beliefs?
- (pp. 93-97)
AbstractWe 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.
Citation2011. "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
- 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