Product Sales Incentive Spillovers to the Lending Market

48 Pages Posted: 28 Jan 2021 Last revised: 20 Apr 2021

See all articles by Mark Jansen

Mark Jansen

University of Utah - Department of Finance

Hieu Nguyen

Foreign Trade University (FTU)

Lamar Pierce

Washington University, Saint Louis - John M. Olin School of Business

Jason Snyder

University of California, Berkeley - Haas School of Business - Business and Public Policy

Date Written: January 7, 2021

Abstract

Automotive manufacturers are known to use deadline-based convex incentives to motivate dealerships to sell new cars. This paper shows that dealerships respond to these incentive targets by pushing customers from used to new cars as the end of the month approaches, and that subprime loans written to finance these end-of-the-month purchases default more often, particularly when written for financially constrained buyers. We also show that the new car buyers at the end of the month are more likely to default because they are sold less reliable models, and are less likely to be covered by insurance that protects them in the event of default. Although consumers undoubtedly bear costs from increased defaults, we find no evidence that the dealerships, or the lenders that purchase these loans, are hurt by the increase in defaults. Our results demonstrate how convex incentives in vertical contract structures can induce gaming behavior with spillover costs to third parties in the supply chain or retail channels.

Keywords: household finance, incentives, auto loans, subprime, agency problems

JEL Classification: D82, G29, G32, G34, L14, R30

Suggested Citation

Jansen, Mark and Nguyen, Hieu and Pierce, Lamar and Snyder, Jason, Product Sales Incentive Spillovers to the Lending Market (January 7, 2021). Available at SSRN: https://ssrn.com/abstract=3762227 or http://dx.doi.org/10.2139/ssrn.3762227

Mark Jansen (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
1655 Campus Center Dr.
Salt Lake City, UT 84112
United States
801-213-6910 (Phone)

HOME PAGE: http://eccles.utah.edu/team/mark-jansen/

Hieu Nguyen

Foreign Trade University (FTU) ( email )

91 Chua Lang St
Dong Da District
Hanoi, Hochiminh city 10000
Vietnam

Lamar Pierce

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5205 (Phone)

Jason Snyder

University of California, Berkeley - Haas School of Business - Business and Public Policy ( email )

545 Student Services Building
Berkeley, CA 94720
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
59
Abstract Views
417
rank
457,773
PlumX Metrics