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Capital rationing under perfect information
Published in Economics Bulletin
Volume: 35
Issue: 2
Pages: 878 - 884
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.
About the journal
JournalEconomics Bulletin
PublisherEconomics Bulletin
Open AccessNo