Three essays in applied microeconomics

This dissertation looks at three examples where commitment has an influence on the outcome of strategic interactions. The first chapter examines the capital structure choice of an incumbent firm that uses firm specific capital as a barrier to entry. Traditionally, models of oligopoly involving firm specific capital have implicitly assumed that firms are financed solely by equity. More recently, several papers have described unrelated strategic benefits associated with debt financing. However, these models ignore the effect debt has on the commitment value of firm specific capital. The primary objective of this chapter is to show that debt financing reduces the commitment value of firm specific capital, which implies that firms face a strategic motive to avoid debt financing. We show this by introducing debt financing within the context of a traditional model of entry deterrence. Canadian data from the period 1984 to 1996 is generally consistent with the implications of this chapter.;The second chapter examines the strategic motives firms have to alter their exposure to demand uncertainty. If financial markets are efficient, theory suggests that firms should not be able to profit by altering their exposure to risk. However, casual empiricism indicates that firms do choose to alter their exposure to risk, by entering contracts contingent on state variables that affect their profitability. This paper presents an explanation of why risk neutral firms would take actions to alter their exposure to risk, even if financial markets are perfectly efficient. An appropriate combination of capital structure and exposure to risk will allow firms to credibly commit to producing a greater amount of output. A single firm may become a Stackleberg leader, whereas multiple firms can become trapped in a Prisoner's Dilemma, each producing more than they would in the absence of uncertainty.;The third chapter examines the behavior of a certification intermediary, who exists in an environment where consumers do not believe statements that he makes. Certification intermediaries observe the quality of a good, and reveal some of the information to consumers. We study the behavior of a single certification intermediary, and show that this intermediary faces the incentive to manipulate the information revealed to consumers, in order to increase the amount of rent it can extract. In particular, we demonstrate a tradeoff the intermediary faces between creating market power for certified producers, and selling its service to a larger number of producers. We also compare the welfare properties of the equilibrium to both the equilibrium that would exist in the absence of certification, and the social planner's problem.