Essays on Automotive Lending, Gasoline Prices, & Automotive Demand
Two events in 2008-2009 had sweeping effects on the global economy and the US automotive sector in particular: the contraction of credit in 2008-2009 and the massive run-up in crude oil prices in late 2008. In 2008, as credit tightened, auto demand declined, and General Motors and Chrysler edged towards bankruptcy, begging the question: "What role does credit have in determining auto market outcomes?" In late 2008, crude oil prices rose sharply, leading many to ask "How will consumers respond to rising gasoline prices?" This dissertation addresses both of these questions.In chapter one, I analyze car manufacturers and their lending subsidiaries, or "captive finance companies." I note that via their captive finance companies, car manufacturers compete against traditional banks and are majority lenders in the auto lending market. Government agencies like the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation have recently expressed interest in captives and auto lending. They have asked for instance whether captives affect the market price for risk. This leads me to my research question: "How does the use of captive finance affect competition and risk in the auto lending and new vehicle markets?" I specify an equilibrium model of the new vehicle and auto lending markets. I estimate parameters from this model using the universe of loan originations and vehicle transactions from a 20% of all US vehicle dealerships. I find that consumers are more responsive to loan principal than to changes in interest rates. Using the estimated model to conduct a counterfactual in which captives cease to exist, I also find that competition between captives and traditional banks leads banks to under-price risk.In chapter two, I ask "How do consumers' vehicle choices respond to changes in their expectations for future gasoline prices?" The 2008 spike in gasoline prices resurfaced questions asked about consumer gasoline consumption and vehicle choice which were originally posed in the 1970's. Since that time, economists have modeled consumers' dynamic responses to gasoline prices. A necessary component of such models is the specification of consumers' expectations over future values of relevant variables like gasoline prices. As data on gasoline price expectations were unavailable, researchers had been forced to make assumptions on how consumers form expectations over future gasoline prices. To address this, I introduce entirely novel data on consumers' gasoline price expectations and stated vehicle preferences. Using these data, I find that consumers' vehicle choices do respond to their expectations for future gasoline prices. Consumers vehicle preferences are persistent, however, which attenuates the effects of gasoline prices on vehicle choices.
