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SAFETY FIRST, BANKRUPTCY, AND THE PRICING AND INVESTMENT DECISIONS OF THE FIRM.
- Source :
-
Economic Inquiry . Oct87, Vol. 25 Issue 4, p695. 12p. - Publication Year :
- 1987
-
Abstract
- The paper analyzes the impact of imposing a constraint on the probability of bankruptcy for the pricing and investment choices of firms. Two models are presented in which a firm faces stochastic demand; in one costs are known with certainty, and in the other costs of production are probabilistic. In both cases the constraint induces a reduction in optimal price if demand is elastic. For less elastic demand, price increases may be indicated. With constant costs, the constraint lowers optimal investment. The results are applicable to the analysis of rating agencies' behavior, or to the design of bond covenants, especially for public utilities. [ABSTRACT FROM AUTHOR]
- Subjects :
- *INVESTMENTS
*BANKRUPTCY
*ELASTICITY (Economics)
*PRICING
Subjects
Details
- Language :
- English
- ISSN :
- 00952583
- Volume :
- 25
- Issue :
- 4
- Database :
- Academic Search Index
- Journal :
- Economic Inquiry
- Publication Type :
- Academic Journal
- Accession number :
- 4506214
- Full Text :
- https://doi.org/10.1111/j.1465-7295.1987.tb00770.x