Mergers and the limited liability effect

• Autores: María Pilar Socorro Quevedo
• Localización: Documentos de Trabajo Conjuntos: Facultades de Ciencias Económicas y Empresariales, Nº. 11, 2004
• Idioma: inglés
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• Resumen

  • This paper analyzes the e.ects of mergers in a homogenous product market with uncertainty over demand, fixed costs, and limited liability debt financing. On the one hand, given the limited liability e.ect, merging parties compete more aggressively and mergers that were unprofitable in absence of any debt obligation may become beneficial. On the other hand, socially advantageous mergers may be unprofitable for the colluding firms. In these cases, public intervention is needed. One possibility consists on subsidizing such mergers. However, it is proved that the combination of limited liability debt financing and an appropriate antitrust policy leads to higher social welfare than subsidies.