Debt as a (Credible) Collusive Device

48 Pages Posted: 3 Jul 2000

See all articles by Giancarlo Spagnolo

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Abstract

The paper presents 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, interlinked banking groups, or simply large banks can ensure the credibility of such commitments (renegotiation-proofness), thereby "exporting" collusion through leverage in otherwise competitive downstream product markets. The results appear relevant to the debate on the relative efficiency of "Anglo-Saxon" vs. "Continental-Japanese" financial practices. Implications for competition policy in the credit market and the regulation of the banking industry are discussed.

JEL Classification: D43, G20, G30, L13, L41

Suggested Citation

Spagnolo, Giancarlo, Debt as a (Credible) Collusive Device. Available at SSRN: https://ssrn.com/abstract=230009 or http://dx.doi.org/10.2139/ssrn.230009

Giancarlo Spagnolo (Contact Author)

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Rome 'Tor Vergata' ( email )

Faculty of Economics - DEI
Via Columbia 2
Rome, RM 00133
Italy

EIEF ( email )

Via Due Macelli, 73
Rome, 00187
Italy

HOME PAGE: http://WWW.EIEF.IT

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