STRATEGIC DEBT AND RJV COMPETITION*

Ho‐chyuan Chen

Australian Economic Papers, 2005, vol. 44, issue 2, 149-161

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.

Date: 2005
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