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Strategic debt in a mixed duopoly: The limited liability effect

Author

Listed:
  • Armel Jacques

    (CEMOI TEPP-CNRS (FR2042), Université de la Réunion)

Abstract

We study the impact of the private firm's debt on the equilibrium of a mixed duopoly by focusing on the effect of limited liability. The debt, combined with the limited liability clause, encourages the private firm to take into account only those states of the nature where demand is high. Debt therefore drives the private firm to increase its production. In response, the public firm reduces its production. Total production is increasing, causing the equilibrium price to fall and the consumer surplus to rise. The social welfare increases thanks to a more efficient allocation of total production between the two firms.

Suggested Citation

  • Armel Jacques, 2023. "Strategic debt in a mixed duopoly: The limited liability effect," Economics Bulletin, AccessEcon, vol. 43(1), pages 309-317.
    • Handle: RePEc:ebl:ecbull:eb-22-00524
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    References listed on IDEAS

    as
    1. de Fraja, Giovanni & Delbono, Flavio, 1989. "Alternative Strategies of a Public Enterprise in Oligopoly," Oxford Economic Papers, Oxford University Press, vol. 41(2), pages 302-311, April.
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    More about this item

    Keywords

    Mixed duopoly; strategic debt.;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise

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