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Strategic Debt And Rjv Competition

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  • HO-CHYUAN CHEN
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    Abstract

    Firms first choose their debt level, next form an RJV and choose R&D investment, and then choose output in Cornot competition. Through the use of debt, a firm commits an aggressive stance, a higher output level, and higher R&D investment, whereby the latter helps solve the free-riding problem that usually exists in R&D studies. However, a firm in an unleveraged industry gains the highest profit, while a leveraged firm in an asymmetric industry (which achieves the highest profit in Brander and Lewis (1988)) gains the lowest profit. As a result, both firms using debt and both firms not using debt are the two equilibria, and the latter survives as a focal outcome. This is in sharp contrast to Brander and Lewis who find that both firms using debt is a prisoner's dilemma outcome. Copyright Blackwell Publishing Ltd/ University of Adelaide and Flinders University 2005..

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Australian Economic Papers.

    Volume (Year): 44 (2005)
    Issue (Month): 2 (06)
    Pages: 149-161

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    Handle: RePEc:bla:ausecp:v:44:y:2005:i:2:p:149-161

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    Cited by:
    1. Franck, Bernard & Le Pape, Nicolas, 2008. "The commitment value of the debt: A reappraisal," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 607-615, March.

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