Are Consumers Affected by Durable Goods Makers' Financial Distress? The Case of Auto Manufacturers

38 Pages Posted: 19 Jul 2010 Last revised: 26 Aug 2010

See all articles by Ali Hortacsu

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Gregor Matvos

University of Texas at Austin - Department of Finance

Chad Syverson

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Sriram Venkataraman

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: July 2010

Abstract

The financial decisions of durable goods makers can impose spillovers on their consumers. Namely, durable goods provide a consumption stream that frequently depends on services provided by the manufacturer (e.g., warranties, parts, and maintenance). Manufacturer bankruptcy, or even the possibility thereof, threatens this service provision and can substantially reduce the value of its products to their current owners. We test this hypothesis in one of the largest durable goods markets, automobiles, using data on millions of used cars sold at wholesale auctions around the U.S. during 2006-8. We find that an increase in an auto manufacturer's financial distress results in a contemporaneous drop in the prices of its cars at auction, controlling for a host of other influences on price. The estimated effects are statistically and economically significant. Furthermore, cars with longer expected service lives (those within manufacturer warranty, having lower mileage, or in better condition) see larger price declines than those with shorter remaining lives. These patterns do not seem to be driven solely by reduced demand from auto dealers affiliated with the troubled manufacturers or by contemporaneous declines in new car prices. Our estimates imply a potentially large indirect cost of financial distress on car manufacturers.

Suggested Citation

Hortacsu, Ali and Matvos, Gregor and Syverson, Chad and Venkataraman, Sriram, Are Consumers Affected by Durable Goods Makers' Financial Distress? The Case of Auto Manufacturers (July 2010). NBER Working Paper No. w16197. Available at SSRN: https://ssrn.com/abstract=1641573

Ali Hortacsu (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-5841 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gregor Matvos

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Chad Syverson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sriram Venkataraman

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
31
Abstract Views
579
PlumX Metrics