Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation
This paper examines the effect of renegotiation on the ability of financial contracts between a lender and entrant to deter an incumbent's predation. In the presence of renegotiation, it is more difficult for the entrant to obtain financing and more difficult for the contract to deter predation. Contracts successfully deter predation in some cases, however, even if renegotiation occurs at a stage with symmetric information between the entrant and lender. Giving the entrant (constrained by limited liability) stronger bargaining power vis-a-vis the lender improves the efficiency of the optimal contract but the results concerning renegotiation are unchanged. Copyright 1996 by Blackwell Publishing Ltd.
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Volume (Year): 44 (1996)
Issue (Month): 3 (September)
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