Capital rationing under perfect information

Arya Kumar Srustidhar Chand () and Amit R k ()
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Amit R k: Indian Institute of Technology, Madras

Economics Bulletin, 2015, vol. 35, issue 2, 878-884

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.

Keywords: Financial contracts; capital rationing; perfect information (search for similar items in EconPapers)
JEL-codes: L0 L2 (search for similar items in EconPapers)
Date: 2015-04-09
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