Professor Justin Murfin (Yale) will be presenting “Who Finances Durable Goods and Why it Matters: Captive Finance and the Coase Conjecture,” co-authored with Ryan Pratt (BYU). The seminar will be held at MIT Sloan in classroom E62-262 on the second floor (100 Main Street, Cambridge, MA; building E62 in MIT terms) from 4:00-5:30.
Abstract: We propose an explanation for the prominent role of manufacturers in the financing of their own product sales, often referred to as “captive financing.” By lending against their own product as collateral, durable goods manufacturers commit to support resale values in future periods, thereby raising prices and preserving rents today. Using data on captive financing by the manufacturers of heavy equipment, we find that captive backed models retain higher resale values. This, in turn, conveys higher pledgeability, even for individual machines financed by banks. Although motivated as a rent seeking device, captive financing generates positive spillovers by relaxing credit constraints.