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A Theory of Predation Based on Agency Problems in Financial Contracting

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  • Bolton, Patrick
  • Scharfstein, David S

Abstract

By committing to terminate funding if a firm's performance is poor, investors can mitigate managerial incentive problems. These optimal financial constraints, however, encourage rivals to ensure that a firm's performance is poor; this raises the chance that the financial constraints become binding and induce exit. The authors analyze the optimal financial contract in light of this predatory threat. The optimal contract balances the benefits of deterring predation by relaxing financial constraints against the cost of exacerbating incentive problems. Copyright 1990 by American Economic Association.

Suggested Citation

  • Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  • Handle: RePEc:aea:aecrev:v:80:y:1990:i:1:p:93-106
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    1. Keech, William R. & Simon, Carl P., 1985. "Electoral and welfare consequences of political manipulation of the economy," Journal of Economic Behavior & Organization, Elsevier, vol. 6(2), pages 177-202, June.
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