Managers, Debt and Industry Equilibrium

Publication Date
Financial Markets Group Discussion Papers DP 289
Publication Authors

This paper reconsiders the strategic effect of debt under the assumption that quantity choices are made by managers whose objective is to avoid bankruptcy. The basic result is that quantity choices, which are strategic substitutes under profit maximization, may turn into strategic complements under reasonable assumptions on the profit function. The value of delegation, optimal wage contracts, and empirical implications are discussed.