Khanna, Naveen; Schroder, Mark - In: Journal of Economic Theory 145 (2010) 1, pp. 156-188
We show how competition in oligopolies, with the possibility of failure and exit of a levered incumbent, affects the ex-ante design of optimal debt contracts. When a levered firm's profits are unobservable, a debt contract imposes the threat of nonrenewal to induce truthful revelation. Because...