NEGOTIATION AND RENEGOTIATION OF OPTIMAL FINANCIAL CONTRACTS UNDER THE THREAT OF PREDATION

The paper examines the effect of renegotiation on the ability of finan cial contracts between a lender and entrant to deter an incumbent's pr edation. In the presence of renegotiation, it is more difficult for th e entrant to obtain financing and more difficult for the contract to d eter predation. Contracts successfully deter predation in some cases, however, even if renegotiation occurs at a stage with symmetric inform ation between the entrant and lender. Giving the entrant (constrained by limited liability) stronger bargaining power vis-a-vis the lender i mproves the efficiency of the optimal contract, but the results concer ning renegotiation are unchanged.