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

Giancarlo Spagnolo

No 243, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: 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.

Keywords: Banks; oligopoly; financial market - product market interaction; capital structure; managerial incentives; collusion; governance. (search for similar items in EconPapers)
JEL-codes: D21 G32 L13 L41 (search for similar items in EconPapers)
Pages: 47 pages
Date: 1998-06-08, Revised 2004-11-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0243

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