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Capital rationing under perfect information

Author

Listed:
  • Arya kumar srustidhar Chand

    (Indian Statistical Institute, Delhi)

  • Amit R k

    (Indian Institute of Technology, Madras)

Abstract

In this paper, we discuss a scenario in capital structure where two divisional managers compete for capital from a firm for their projects in a perfect information setting. We consider verifiable profits and study take-it-or-leave-it contracts where the managers ask for capital from the firm privately or sequentially in public and offer a part of the profit to the firm. Under capital constraint, we demonstrate that in private meeting, there is no sub game perfect Nash equilibrium (SPNE) in pure strategies; but in sequential public meeting, SPNE exists in pure strategies and, for the firm it is better to operate under capital constraint to increase the competition among managers.

Suggested Citation

  • Arya kumar srustidhar Chand & Amit R k, 2015. "Capital rationing under perfect information," Economics Bulletin, AccessEcon, vol. 35(2), pages 878-884.
    • Handle: RePEc:ebl:ecbull:eb-15-00096
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial contracts; capital rationing; perfect information;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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