77 Pages Posted: 26 May 2016 Last revised: 17 Feb 2017
Date Written: February 2017
We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex-post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive backed products, even for individual machines financed by banks. Although motivated as a rent seeking device, captive financing generates positive spillovers by relaxing credit constraints.
Keywords: Captive Finance, Vendor Finance, Trade Credit, Durable Goods, Limited Commitement, Time-inconsistency, Asymmetric Information
JEL Classification: G20, G23
Suggested Citation: Suggested Citation
Murfin, Justin and Pratt, Ryan, Who Finances Durable Goods and Why it Matters: Captive Finance and the Coase Conjecture (February 2017). Available at SSRN: https://ssrn.com/abstract=2784519 or http://dx.doi.org/10.2139/ssrn.2784519