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| Author: | Faure-Grimaud, A. |
| Title: | Product market competition and optimal debt contracts: the limited liability effect revisited |
| Journal: | European Economic Review
2000 : DEC, VOL. 44:10, p. 1823-1840 |
| Index terms: | PRODUCT MARKETING COMPETITION DEBT |
| Language: | eng |
| Abstract: | This paper shows that asymmetric information between lenders and borrowers plays a crucial role in the existence of interactions between financial decisions and output market strategies. Lenders offer an optimal, renegotiation- proof financial contract which resembles a standard debt contract. Computing Cournot equilibria, debt causes firms to compete less aggressively: the usual (positive) limited liability effect on quantities is offset by a negative one due to (endogenous) financial costs. |
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