Innovation under financial restrictions

Arbeitspapier

How do financial constraints influence innovative activities of firms? In a two-period model of price competition with differentiated products we first analyze the incentives to innovate when both firms are self-financed. We then assume that one of the firms is financially constrained and therefore has to apply for a bank loan. If Information is asymmetrically distributed between the bank and the firm, the optimal, incentive-compatible debt contract will lead to a reduction of the innovative efforts of the financially restricted firm. On the other side, the unleveraged rival will increase her innovative activities and might even become a monopolist in the second period of competition. If we finally assume that both firms are financially constrained and apply for a loan at their house bank, we can show that Innovation activities are further reduced and overall welfare will decline.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tübinger Diskussionsbeiträge ; No. 129

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Oligopoly and Other Imperfect Markets ; Innovation and Invention: Processes and Incentives
• Subject: competition ; Innovation ; financial contract ; asymmetric Information ; Forschung ; Innovation ; Wettbewerb ; Duopol ; Unternehmensfinanzierung ; Anreizvertrag ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Neff, Cornelia
• Event: Veröffentlichung
• (who): Eberhard Karls Universität Tübingen, Wirtschaftswissenschaftliche Fakultät
• (where): Tübingen
• (when): 1998

Further information

• Handle: http://hdl.handle.net/10419/104955
• Last update: 10.03.2025, 11:43 AM CET