The commitment value of the debt: A reappraisal
AbstractWe analyze the strategic use of the debt in a duopoly model of Cournot competition. We consider a two stage model where debt acts as a commitment variable and we characterize subgame perfect equilibria. We differ from several models based on the strategic value of the debt such as Wanzenried [Wanzenried G. (2003), "Capital Structure Decisions and Output Market Competition Under Demand Uncertainty", International Journal of Industrial Organization 21, 171-200.] in showing that, if one assumes that the debt level acts as a commitment device, it is incorrect to consider bankruptcy risk as a strategic variable. We demonstrate properties concerning the influence of price volatility and product differentiation upon equilibrium values of production, default risk and debt obligation.
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Industrial Organization.
Volume (Year): 26 (2008)
Issue (Month): 2 (March)
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Web page: http://www.elsevier.com/locate/inca/505551
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