Collusion through debt and managers

We investigate the anticompetitive effects of debt financing and managerial incentives in the presence of managers incurring personal bankruptcy costs. We characterize the strategic value for firms' shareholders of resorting to debt and managerial incentives as complementary devices to sustain collusion among firms, when managerial bankruptcy costs are sufficiently responsive to the severity of financial distress. The shareholders' inability to commit to debt and managerial contracts implies that common lending to different firms constitutes a key driver for collusion. These results square with the well‐documented empirical evidence on debt financing, managerial incentives, and common lending in sectors plagued by collusion.