Emergence of captive finance companies and risk segmentation in loan markets: Theory and rvidence

John M. Barron, Byung Uk Chong, Michael E Staten

Research output: Contribution to journalArticle

5 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)173-192
Number of pages20
JournalJournal of Money, Credit and Banking
Volume40
Issue number1
DOIs
StatePublished - Feb 2008
Externally publishedYes

Fingerprint

Segmentation
Credit
Finance companies
Loans
Prediction
Seller
Product market
Rent
Bank loans
Purchase
Market power

Keywords

  • Captive finance company
  • Consumer loan market
  • Differential loan performance
  • Monopolistic competition

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Emergence of captive finance companies and risk segmentation in loan markets : Theory and rvidence. / Barron, John M.; Chong, Byung Uk; Staten, Michael E.

In: Journal of Money, Credit and Banking, Vol. 40, No. 1, 02.2008, p. 173-192.

Research output: Contribution to journalArticle

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