American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
A Bargaining-Based Model of Security Design
American Economic Journal: Microeconomics
vol. 13,
no. 3, August 2021
(pp. 443–73)
Abstract
This paper studies how security design affects project outcomes. Consider a firm that raises capital for multiple projects by offering investors a share of the revenues. The revenue of each project is determined ex post through bargaining with a buyer of the output. Thus, the choice of security affects the feasible payoffs of the bargaining game. We characterize the securities that achieve the firm's maximal equilibrium payoff in bilateral and multilateral negotiations. In a large class of securities, the optimal contract is remarkably simple. The firm finances each project separately with defaultable debt. Welfare and empirical implications are discussed.Citation
Tsur, Matan. 2021. "A Bargaining-Based Model of Security Design." American Economic Journal: Microeconomics, 13 (3): 443–73. DOI: 10.1257/mic.20190019Additional Materials
JEL Classification
- C78 Bargaining Theory; Matching Theory
- D21 Firm Behavior: Theory
- D86 Economics of Contract: Theory
- G12 Equities; Fixed Income Securities
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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