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Two-period financial contracts and product market competition

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  • Stadler, Manfred
Abstract
This paper examines optimal two-period financial contracts between firms in a product market on the one side and banks as creditors on the other side. Similar to the Bolton-Scharfstein contracts, banks can mitigate the moral hazard problem of truthfully revealing the ex ante unknown profits of firms by credibly committing to terminate funding in the second period if the firms' Performance in the first period is poor. In contrast to Bolton-Scharfstein contracts we assume that the firms rather than the banks have all the bargaining power. We show that the termination threat will still be used by banks, but to a lesser extent, thereby making the contracts more efficient. Efficiency decreases, however, with the banks' market power because the probability of continued funding in the second period declines. Using the consumer switching cost approach to model Strategie price competition between the rivals in a product market, we can fiirthermore show that the need for debt financing leads to a price increase in the product market. On the one hand this effect is due to the information problem itself, on the other hand it is strengthened by the market power of banks.

Suggested Citation

  • Stadler, Manfred, 1996. "Two-period financial contracts and product market competition," Tübinger Diskussionsbeiträge 86, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:86
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    References listed on IDEAS

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    1. Bester, Helmut, 1994. "The Role of Collateral in a Model of Debt Renegotiation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 72-86, February.
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    3. Dasgupta, Sudipto & Titman, Sheridan, 1998. "Pricing Strategy and Financial Policy," The Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 705-737.
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    6. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    7. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    8. Chevalier, Judith A, 1995. "Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
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    Cited by:

    1. Neff, Cornelia, 1997. "Finanzstruktur und strategischer Wettbewerb auf Gütermärkten," Tübinger Diskussionsbeiträge 89, University of Tübingen, School of Business and Economics.

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