Captive Finance and the Coase Conjecture∗

In this paper, we propose an explanation for the prominent role of manufacturers in the financing of their own product sales— so called “captive finance.” By lending against their own product as collateral, durable goods manufacturers with market power can commit to restrict production and maintain resale values in future periods, preserving rents today. Using data on captive financing support by the manufacturers of heavy equipment, we find evidence that captive financed models retain higher resale values, especially when the manufacturer has pricing power. The higher resale values enjoyed by captive financed models also convey higher pledgeability and thus allow lower downpayments, even when machines are financed by banks. We find that models with a history of captive support are preferred by buyers when financing constraints are binding. Although motivated as a rent-seeking device, captive financing may generate positive spillovers if credit constraints are important. ∗Correspondence: Murfin: [email protected], (203)436-0666. Pratt: [email protected], (801)422-1222.