Product Sales Incentive Spillovers to the Lending Market: Evidence from Subprime Auto Loan Defaults

Mark Jansen, Lamar Pierce (), Jason Snyder () and Hieu Nguyen ()
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Lamar Pierce: Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130
Jason Snyder: Eccles School of Business, University of Utah, Salt Lake City, Utah 84112
Hieu Nguyen: Foreign Trade University, Láng Thượng, Đống Đa, Hanoi, Vietnam

Management Science, 2024, vol. 70, issue 8, 5463-5480

Abstract: This paper shows how convex incentives in vertical contracts between manufacturers and retailers can induce sales behavior with costs to consumers. We examine this problem in the automotive sector, where manufacturers commonly motivate new vehicle sales through dealer incentive programs with large discrete bonuses determined by monthly sales targets. Using subprime car loans from over 3,500 dealerships, we document high default rates on new car loans originated at the end of the month—the period when dealerships attempt to secure target-based bonuses by intensifying efforts to sell new cars. We provide evidence consistent with the observed higher default rates resulting from customers purchasing new vehicles at month end. New car purchases stretch borrower budgets and expose borrowers to rapid depreciation, which consigns the borrower with negative equity through much of the loan term. Our results imply that the quartile of customers with the highest payment-to-income ratio see default rates increase from 13.6% to 19.7% on the last day of the month. Although consumers bear high costs from increased defaults, we find no evidence that lenders that purchase the loans are hurt by the default increase. Our results demonstrate how the behaviors induced by convex incentive schemes for sales are borne by customers.

Keywords: industrial organization: firm objectives; organization and behavior; organizational studies: motivation-incentives; organizational studies: strategy; organizational studies: strategy; finance; economics: microeconomic behavior (search for similar items in EconPapers)
Date: 2024
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