Is an automaker's road to bankruptcy paved with customers' beliefs?

Ali Hortaçsu*, Gregor Matvos, Chaehee Shin, Chad Syverson, Sriram Venkataraman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

We explore the role the feedback loop between firms' financial health and consumers' demand for their products plays in the auto market. We construct a simple model of an automaker making pricing and debt service (continuation) decisions while recognizing that consumers are sensitive to whether it stays in business. We show that multiple equilibria can exist in such a model, and calibrate it to match stylized facts surrounding GM's recent bankruptcy. The results suggest that while the impact of financial distress on demand substantially reduced GM's profit, bank-run-like multiple equilibria do not appear likely in this market.

Original languageEnglish (US)
Pages (from-to)93-97
Number of pages5
JournalAmerican Economic Review
Volume101
Issue number3
DOIs
StatePublished - May 2011

ASJC Scopus subject areas

  • Economics and Econometrics

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