Enabling the willing: Consumer rebates for durable goods

F or many consumers who use loans to acquire an expensive durable such as a car, the market value of their current (used) durable is less than the outstanding loan amount. If these consumers want to replace their used durable with a new one, they might not be able to do so because of the added burden of paying off the amount of negative equity. We develop and solve a model in which a durable goods manufacturer gives consumers a cash rebate, so that they can get out of the negative equity problem. We find that under certain conditions, the manufacturer offering a lower durability product is more likely to give cash rebates and, when such rebates are given, to offer a greater cash rebate. These rebates also lead to higher prices net of the rebate compared with the situation without any such rebates. We empirically test some of our equilibrium results and find support for our model predictions.