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We show that a private firm has an incentive to take on strategic debt in order to increase its profit expectation in a mixed duopoly. This strategic indebtedness can have two different effects. The first is a bailout effect, which induces the public firm to decrease its output to reduce the probability or negative consequences of the private firm’s bankruptcy. The second is a limited liability effect, which causes the private firm to increase its output. If bankruptcy costs are low, debt allows for an increase in social surplus. If bankruptcy costs are high, debt causes a decrease in social welfare. JEL codes: D43, L13, L32.