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The Strategic Role of Dividends and Debt in Markets with Imperfect Competition

Author

Listed:
  • Engelbert J. Dockner

    (Vienna University of Economics and Business)

  • Helmut Elsinger

    (Oesterreichische Nationalbank)

  • Andrea Gaunersdorfer

    (University of Vienna)

Abstract

In a seminal paper Brander and Lewis (Am Econ Rev 76:956–970, 1986) show that oligopolistic firms with limited liability follow a more aggressive output strategy as their leverage increases. In a follow-up paper Glazer (J Econ Theory 62:428–443, 1994) points out that when debt is long term and rival firms choose their equilibrium quantities in two consecutive periods, they have an incentive to be more collusive in the first period than static oligopolists would be. In this paper we argue that the incentive to collude is driven by limited liability and the dividend policy of the firm. We find that increasing leverage causes firms in both periods to increase their output and hence to be more aggressive. Additionally, we find that it is always optimal to pay out profits immediately. Moreover, we show that the symmetric game admits multiple equilibria some of which cause firms to choose asymmetric product market strategies.

Suggested Citation

  • Engelbert J. Dockner & Helmut Elsinger & Andrea Gaunersdorfer, 2018. "The Strategic Role of Dividends and Debt in Markets with Imperfect Competition," Dynamic Games and Applications, Springer, vol. 8(3), pages 601-619, September.
    • Handle: RePEc:spr:dyngam:v:8:y:2018:i:3:d:10.1007_s13235-018-0246-x
    DOI: 10.1007/s13235-018-0246-x
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    References listed on IDEAS

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    Cited by:

    1. Alla V. VAVILINA & Lidiya N. LEVANOVA & Irina N. TKACHENKO, 2019. "Interrelation between dividend policy and corporate reputation in Russian companies," Upravlenets, Ural State University of Economics, vol. 10(4), pages 14-23, September.
    2. Steffen Jørgensen & Ngo Long & Gerhard Sorger, 2018. "Preface: Special issue of Dynamic Games and Applications in Memory of Professor Engelbert J. Dockner," Dynamic Games and Applications, Springer, vol. 8(3), pages 457-467, September.
    3. Ren, Xiaohang & Qin, Jianing & Jin, Chenglu & Yan, Cheng, 2022. "Global oil price uncertainty and excessive corporate debt in China," Energy Economics, Elsevier, vol. 115(C).

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