Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104955
Authors: 
Neff, Cornelia
Year of Publication: 
1998
Series/Report no.: 
Tübinger Diskussionsbeiträge 129
Abstract: 
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.
Subjects: 
competition
Innovation
financial contract
asymmetric Information
JEL: 
D82
G32
L13
O31
Document Type: 
Working Paper

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