Investment Timing and Predatory Behavior in Duopoly with Debt

[PRELIMINARY VERSION] This paper examines the e¤ect of debt and limited liability on investment timing in a duopoly with aggregate demand uncertainty and irreversible investment. Two patterns of investment emerge, depending on the parameter values and debt-levels. If debt levels of the competitors are su¢ciently di¤erent, an increase in debt delays investment. As debt-levels become more homogeneous, a race for market shares begins, as …rms wish to commit to not quitting the market …rst in adverse states. Moreover, …rms may engage in predatory investment, if the competitor has a comparably high debt burden. Therefore, debt has a strategic disadvantage. So this paper can explain both the relative low debt-ratios observed in most industries and the strong investment activities in exceptionally highly leveraged industries. Moreover, the model of this paper can explain predatory behavior of …rms with neither relying on reputational, on network- or learning-e¤ects, nor on de…ning predatory behavior as deviations from tacit collusion