The commitment value of the debt: A reappraisal

Bernard Franck and Nicolas Le Pape

International Journal of Industrial Organization, 2008, vol. 26, issue 2, 607-615

Abstract: We analyze the strategic use of the debt in a duopoly model of Cournot competition. We consider a two stage model where debt acts as a commitment variable and we characterize subgame perfect equilibria. We differ from several models based on the strategic value of the debt such as Wanzenried [Wanzenried G. (2003), "Capital Structure Decisions and Output Market Competition Under Demand Uncertainty", International Journal of Industrial Organization 21, 171-200.] in showing that, if one assumes that the debt level acts as a commitment device, it is incorrect to consider bankruptcy risk as a strategic variable. We demonstrate properties concerning the influence of price volatility and product differentiation upon equilibrium values of production, default risk and debt obligation.

Date: 2008
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Citations: View citations in EconPapers (11)

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Working Paper: 'The Commitment Value of the Debt: a Reappraissal' (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:26:y:2008:i:2:p:607-615

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