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Bargaining and brinkmanship: capital structure choice by regulated firms

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>1993
<mark>Journal</mark>International Journal of Industrial Organization
Issue number4
Volume11
Number of pages20
Pages (from-to)215-234
<mark>State</mark>Published
<mark>Original language</mark>English

Abstract

A bargaining model of regulation is developed. It is shown that regulated firms can improve their bargaining positions and induce the regulator to set higher prices for firm output by choosing more debt. Firms, in choosing an optimal level of debt, trade off this bargaining advantage against expected bankruptcy costs. The model predicts that firms would tend to choose higher levels of debt in harsher regulatory environments. This prediction is shown to be consistent with cross-sectional evidence for U.S. electric utilities for the sample period 1972–1983.