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Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation

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  • Snyder, Christopher M

Abstract

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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  • Snyder, Christopher M, 1996. "Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 325-343, September.
    • Handle: RePEc:bla:jindec:v:44:y:1996:i:3:p:325-43
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    1. Besanko, David & Doraszelski, Ulrich & Kryukov, Yaroslav, 2020. "Sacrifice tests for predation in a dynamic pricing model: Ordover and Willig (1981) and Cabral and Riordan (1997) meet Ericson and Pakes (1995)," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    2. Kwok Ho Chan & KaWai Terence Fung & Zhou Lu, 2015. "Predation Due to Bargaining Power Difference in Financial Contracting," Economic Research Guardian, Weissberg Publishing, vol. 5(2), pages 121-132, December.
    3. Gerratana Emanuele & Koçkesen Levent, 2012. "Strategic Effects of Renegotiation-Proof Contracts," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-49, July.
    4. Marquez, Robert, 2010. "Informed lending as a deterrent to predation," Finance Research Letters, Elsevier, vol. 7(4), pages 193-201, December.
    5. Emanuele Gerratana & Levent Koçkesen, 2015. "Commitment without reputation: renegotiation-proof contracts under asymmetric information," Review of Economic Design, Springer;Society for Economic Design, vol. 19(3), pages 173-209, September.
    6. Gans, Joshua S. & King, Stephen P., 2002. "Exclusionary contracts and competition for large buyers," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1363-1381, November.
    7. Emanuele Gerratana & Levent Kockesen, 2012. "Renegotiation-Proof Third-Party Contracts under Asymmetric Information," Koç University-TUSIAD Economic Research Forum Working Papers 1208, Koc University-TUSIAD Economic Research Forum.
    8. Abdulaziz Istaitieh & José M. Rodríguez‐Fernández, 2006. "Factor‐product markets and firm's capital structure: A literature review," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 49-75.
    9. Arping, Stefan & Diaw, Khaled M., 2008. "Sunk costs, entry deterrence, and financial constraints," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 490-501, March.
    10. Arve, Malin, 2014. "Procurement and predation: Dynamic sourcing from financially constrained suppliers," Journal of Public Economics, Elsevier, vol. 120(C), pages 157-168.
    11. Neff, Cornelia, 1998. "Innovation under financial restrictions," Tübinger Diskussionsbeiträge 129, University of Tübingen, School of Business and Economics.
    12. Fernandez-Ruiz, Jorge, 2004. "Predation due to adverse selection in financial markets," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 715-733, May.
    13. Michael Riordan, 2003. "How Do Capital Markets Influence Product Market Competition?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 179-191, December.
    14. Dang, Viet Anh, 2010. "Optimal financial contracts with hidden effort, unobservable profits and endogenous costs of effort," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 75-89, February.
    15. Istaitieh, Abdulaziz & Rodriguez-Fernandez, Jose M., 2006. "Factor-product markets and firm's capital structure: A literature review," Review of Financial Economics, Elsevier, vol. 15(1), pages 49-75.
    16. Fiona Scott Morton, 1997. "Entry and Predation: British Shipping Cartels 1879–1929," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 679-724, December.

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