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Strategic Debt And Rjv Competition

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  • HO-CHYUAN CHEN

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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  • Ho-Chyuan Chen, 2005. "Strategic Debt And Rjv Competition ," Australian Economic Papers, Wiley Blackwell, vol. 44(2), pages 149-161, June.
  • 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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