Optimal debt contracts and product market competition with exit and entry

• 成果类型: Article
• 署名作者: Khanna, Naveen; Schroder, Mark
• 署名单位: Michigan State University; Michigan State University's Broad College of Business
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2009.05.005
• 发表日期: 2010
• 页码: 156-188
• 关键词: Contract theory; debt; asymmetric information; predation

摘要

We show how competition in oligopolies, with the possibility of failure and exit of a levered incumbent, affects the ex-ante design of optimal debt contracts. When a levered firm's profits are unobservable, a debt contract imposes the threat of nonrenewal to induce truthful revelation. Because nonrenewal impacts the future profitability of the surviving competitor, the contract influences the competitor's pricing strategy and the equilibrium profits of both firms. The optimal contract is quite different from it standard debt contract, and induces the competitor to be less aggressive, resulting in higher equilibrium prices and profits, and higher returns for investors. (C) 2009 Elsevier Inc. All rights reserved.