Consumer Choice and Corporate Bankruptcy
89 Pages Posted: 8 Jul 2021 Last revised: 9 May 2022
Date Written: May 6, 2022
Using incentivized randomized experiments, we estimate the causal effect of a Chapter 11 bankruptcy filing on consumer demand for the bankrupt firm's products. Knowledge of a firm's bankruptcy reduces a consumer's willingness-to-pay by 18-35%, depending on the industry. 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 bankruptcy on consumer welfare and a bankrupt firm's market share.
Keywords: Consumer choice, bankruptcy, financial distress, structural estimation, experimental economics, Hertz
JEL Classification: D12, L15, G33
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