Precommitment and Financial Structure: An Analysis of the Effects of Taxes

Varouj Aram Aivazian () and Michael K. Berkowitz

Economica, 1992, vol. 59, issue 233, pages 93-106

Abstract: While modern industrial organization theory predicts the use of sunk costs to deter entry, this paper examines some factors that might act to moderate the commitment value of capital and, hence, the entry-barring impact of these sunk costs--to the point, perhaps, that empirical detection might be difficult. The authors show that the tax system and financial contracts of the incumbent firm may affect its optimal precommitment decision and, in fact, may attenuate the strategic incentives for precommitment. Copyright 1992 by The London School of Economics and Political Science.

Date: 1992
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