Debt and Capacity Commitments

Abstract

In capital-intensive industries, firms face complicated multi-staged financing, investment, and production decisions under the watchful eye of existing and potential industry rivals. In various representations of this environment, we show that a first-mover advantage in debt weakly dominates a first-mover advantage in capacity. Without a first-mover advantage in debt, the incumbent may suffer a dead-weight loss. When both the entrant and incumbent deploy debt prior to capacity, a first-mover in capacity benefits from softer competition. With a long-purse debt cost, leading in debt still remains advantageous.