Consumer Choice and Corporate Bankruptcy
43 Pages Posted: 8 Jul 2021 Last revised: 18 Aug 2021
Date Written: August 17, 2021
Using an incentivized randomized experiment, we estimate the causal effect of a Chapter 11 bankruptcy filing on consumer demand for the bankrupt firm's products. Knowledge of Hertz's Chapter 11 bankruptcy reduces consumers' willingness-to-pay for Hertz by 35%. We show evidence that consumers fear both (i) a liquidation preventing future relationships with a firm and (ii) a decline in quality while a firm reorganizes. Estimating a structural model of consumer demand, we quantify the large negative impact of Hertz's bankruptcy on Hertz's market share and consumer welfare. We find that educating consumers about Chapter 11 can improve consumer welfare.
Keywords: Consumer choice, bankruptcy, financial distress, structural estimation, experimental economics, Hertz
JEL Classification: D12, L15, G33
Suggested Citation: Suggested Citation