A bargaining-based model of security design

Matan Tsur

Publications: Contribution to journalArticlePeer Reviewed

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.
Original languageEnglish
Pages (from-to)443-473
JournalAmerican Economic Journal: Microeconomics
Volume13
Issue number3
DOIs
Publication statusPublished - Aug 2021

Austrian Fields of Science 2012

  • 502021 Microeconomics
  • 502047 Economic theory

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