Emergence of Captive Finance Companies and Risk Segmentation in Loan Markets: Theory and Evidence

John Barron (), Byung-Uk Chong and Michael E. Staten

Journal of Money, Credit and Banking, 2008, vol. 40, issue 1, pages 173-192

Abstract: A seller with some degree of market power in its product market can earn rents. In this context, there is a gain to granting credit to purchase of the product and thus to the establishment of a captive finance company. This paper examines the optimal behavior of such a durable good seller and its captive finance company. The model predicts a critical difference between the captive finance company's credit standard and that of independent lenders ("banks"), namely, that the captive finance company will adopt a more lenient credit standard. Thus, we should expect the likelihood of repayment of a captive loan to be lower than that of a bank loan, other things equal. This prediction is tested using a unique data set drawn from a major credit bureau in the United States, and the evidence supports the theoretical prediction. Copyright 2008 The Ohio State University.

Downloads: (external link)
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2008.00108.x link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this article

Journal of Money, Credit and Banking is edited by Pok-Sang Lam, Deborah Lucas, Masao Ogaki and Kenneth D. West

More articles in Journal of Money, Credit and Banking from Blackwell Publishing
Series data maintained by Christopher F. Baum ().