Dynamic Pricing Under Debt: Spiraling Distortions and Efficiency Losses

Firms often borrow to finance inventory, then price that inventory both to earn a profit and to service the debt. We show limited liability leads such sellers to charge higher prices and discount more slowly, and that these distortions compound over time into a downward performance spiral. We then quantify how much of the loss practical debt covenants can recover.

Management Science, vol. 64, no. 10, pp. 4572–4589