Tiziano De Angelis, Fabien Gensbittel, Stéphane Villeneuve
Published 2023-12-12Version 1
We construct a Nash equilibrium in feedback form for a class of two-person stochastic games with absorption arising from corporate finance. More precisely, the paper focusses on a strategic dynamic game in which two financially-constrained firms operate in the same market. The firms distribute dividends and are faced with default risk. The strategic interaction arises from the fact that if one firm defaults, the other one becomes a monopolist and increases its profitability. To determine a Nash equilibrium in feedback form, we develop two different concepts depending on the initial endowment of each firm. If one firm is richer than the other one, then we use a notion of control vs.\ strategy equilibrium. If the two firms have the same initial endowment (hence they are symmetric in our setup) then we need mixed strategies in order to construct a symmetric equilibrium.
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