Hennessy, Christopher A.; Tserlukevich, Yuri - In: Journal of Economic Theory 143 (2008) 1, pp. 374-404
We analyze debt choice in light of taxes and moral hazard. The model features an infinite sequence of nonzero-sum stochastic differential games between equity and debt. Closed-form expressions are derived for all contingent-claims. If equity can increase volatility without reducing asset drift,...