James A. Brander, professor of Asia-Pacific International Trade, University of British Columbia is co-author of a seminal 1986 article in The American Economic Review, with Tracy R. Lewis, on “Oligopoly and Financial Structure: The Limited Liability Effect.” The University of British Columbia (UBC) is a public university with its main campus located at Point Grey, in the University Endowment Lands adjacent to Vancouver, British Columbia, Canada and another smaller campus known as UBC Okanagan located in Kelowna, British Columbia. ... 1986 (MCMLXXXVI) was a common year starting on Wednesday of the Gregorian calendar. ... Tracy R. Lewis, professor of economics at the University of Florida, reaches environmental economics and energy regulation to MBA students. ... To meet Wikipedias quality standards, this article may require cleanup. ...

Brander and Lewis proposed a model in which it might be rational for the managers of a corporation to load up on debt, to a degree that would be socially disfunctional. A corporation is a legal person which, while being composed of natural persons, exists completely separately from them. ...

The argument depends on a central feature of corporations, the limited liability of shareholders. From their point of view, liquidation is the end of matters. A share of common stock never becomes a liability – its value doesn’t drop below $0. So in certain situations in which management might be tempted to take a risky gamble with borrowed money, stockholders will go along, since the question whether the firm ought to take this gamble might be a choice between the certainty of owning nothing and the possibility of owning $0.20 – not a difficult choice. (The spirit of Blaise Pascal hangs over this portion of the argument.) Blaise Pascal (pronounced []), (June 19, 1623 – August 19, 1662) was a French mathematician, physicist, and religious philosopher. ...

Bondholders, on the other hand, would have something to lose beyond liquidation. The value of their bonds in the context of an eventual corporate liquidation or re-organization will be lessened if the corporation makes this gamble and fails at it, because there will be a new round of debtors with whom they'd then have to split the remnant assets. Look up bond in Wiktionary, the free dictionary. ... Liquidation, or winding up, refers to a business whose assets are converted to money in order to pay off debt. ...

Brander and Lewis, writing for the sake of simplicity about a hypothetical duopoly, suggested that management on one side might deliberately incur debts in order to wed its interests to those of the shareholders and pursue with their support a risky low-margin, high-output strategy that in turn may gain market share. This gamble has a chance of success if the other duopolist is low-risk, and would rather leave the market than engage in a price-cutting war. On the other hand, if both duopolists adopt the same approach, though, the result is that they are both worse off than if neither had. Furthermore, that result will have negative social utility -- the affected market will resemble the recent airline industry in North America. A true duopoly is a form of oligopoly where only two producers exist in a market. ... World map showing North America A satellite composite image of North America. ...