Abstract
In a Cournot duopoly with perfect information, the choice of a bank loan commitment with observable terms allows an entrepreneur to adopt an aggressive stance on the product market and to increase his market share and profit. Such an approach, however, becomes problematic exactly then when entrepreneur and bank are able to enter into new loan commitments by way of secret renegotiations. The reason for this is that if the entrepreneur anticipates that it is optimal to cancel secretely earlier bank loan commitments, he will ex ante not be motivated to finalise a loan commitment with observable terms. On the other hand, the entrepreneur may obtain private information on future market demand before the start of secret renegotiations. His behaviour would then signalise to the bank the value of the bank loan commitment. It can be seen that, in an optimum situation, the entrepreneur will secretely cancel only one part of the existing bank loan commitment by way of renegotiations, thus preserving its positive strategic effect.
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