Product Sales Incentive Spillovers to the Lending Market

We examine how deadline-based convex incentives in physical product markets can affect the credit markets that finance these products. Auto dealerships respond to monthly sales targets in manufacturer incentive programs by shifting borrowers from used to new cars at the end of the month. End-of-month loans default more often, particularly among financially constrained buyers of new cars. At month-end, dealerships sway financially unsophisticated buyers to buy new cars instead of more reliable models that are available as used vehicles. We find no evidence that lenders or dealerships are hurt by this increased default risk from manufacturers' incentives.