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Debt as a (Credible) Collusive Device, or: "Everybody Happy but the Consumer"

Listed author(s):
  • Spagnolo, Giancarlo

    ()

    (Dept. of Economics, Stockholm School of Economics)

The paper proposes a theory of the anti-competitive effects of debt finance based on the interaction between capital structure, managerial incentives, and firms' ability to sustain collusive agreements. It shows that shareholders' commitments that reduce conflicts with debtholders - such as hiring managers with valuable reputations or "conservative" incentives - besides reducing the agency costs of debt finance also greatly facilitate tacit collusion in product markets. Concentrated or collusive credit markets, or large banking groups, can ensure the credibility of such commitments (renegotiation-proofness), thereby "exporting" collusion through leverage in otherwise competitive downstream product markets.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0243.pdf
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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 243.

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Length: 47 pages
Date of creation: 08 Jun 1998
Date of revision: 01 Aug 2004
Handle: RePEc:hhs:hastef:0243
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The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

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