Collusion Through Debt and Managers

In a market where firms interact over time, we investigate the anticompetitive effects of debt finance and managerial incentives when managers incur personal costs of bankruptcy. We show that firms’ shareholders resort to debt and managerial incentives as complementary strategic devices to sustain collusion, provided that the managerial costs of bankruptcy are sufficiently responsive to the severity of financial distress. Limited commitment to debt and managerial contracts exacerbates the shareholders’ reliance on debt and managerial incentives. Our results provide theoretical corroboration for empirical regularities regarding firms’ financial structure and corporate governance in markets plagued by collusion and deliver policy implications