Strategic Debt in Vertical Relationships

Gianni De Fraja and Claudio Piga

Discussion Papers from Department of Economics, University of York

Abstract: We study a vertical relationship between two firms, and we show that the extent of the downstream firm's borrowing affects the contract offered by the upstream firm. We establish a negative relationship between the level of debt and the downstream firm's probability of bankrupt. We also show that, unless the interest rate is very high, there exists a conflict of interest between the upstream and the downstream firm: the latter wants to take on more debt than the former would like it to.We interpret this finding as an explanation of the constraint imposed by franchisors on the debt level of their franchisees.

Keywords: Contract Theory; Capital Structure; Franchise (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Strategic Debt in Vertical Relationships (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:98/16

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