Emergence of captive finance companies and risk segmentation in loan markets: theory and evidence.(Statistical table)(Report)

From: Journal of Money, Credit & Banking | Date: February 1, 2008| Author: | Copyright information

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 ...

<0), and each additional sale generates positive profits given the positive markup on the durable good, ([bar.p] - [kappa])><[[??].sub.B], such that the expected default rate of a captive loan is higher than the expected default rate of a bank loan, or [delta]([[??].sub.F])><[bar.p] and [??]>

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