This research develops a new benchmark theoretical model to understand how imperfections in financial markets impact the strategic interactions between individual firms and the long run dynamics of different industries. The interplay between limited access to capital markets and strategic behavior by firms can have a significant impact on prices, corporate investment and the degree of industrial concentration. The project will show that financial frictions are consequential for the industrial organization. The findings will have important implications for corporate finance by taking into account the strategic interplay between firms.
This project will explore how financial market imperfections impact dynamic strategic interactions between firms and industry. The project will develop a new benchmark theoretical setting that integrates core insights about the impact of financial frictions on investment with dynamic industrial organization. The first project constructs a parsimonious baseline tug-of-war theoretical setting in which two firms compete to enjoy a dominant position. The second project develops a workhorse settings used in applied corporate finance to analyze the impact of financial frictions on investment. Baseline model yields three preliminary findings: (i) Financial frictions often lead firms charge lower prices in equilibrium; (ii) Financial frictions may slow down industry concentration; and (ii) Even when financial frictions lead to a more concentrated industry in the long run, there is higher investment along the way. The project, on the overall suggests that financial frictions may act as a pro-competitive force.