Who Finances Durable Goods and Why It Matters: Captive Finance and the Coase Conjecture

Who Finances Durable Goods and Why It Matters: Captive Finance and the Coase Conjecture

  • JUSTIN MURFIN
  • RYAN PRATT

Article first published online: 20th December 2018 DOI: 10.1111/jofi.12745

Abstract


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.

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