Abstract
We investigate the anticompetitive effects of debt financing and managerial incentives in a framework where managers incur personal bankruptcy costs. We characterize the strategic value for firms’ shareholders of resorting to debt and managerial incentives as complementary devices to sustain collusion in the product market, provided that managerial bankruptcy costs are sufficiently responsive to the severity of financial distress. Shareholders’ limited commitment to debt and managerial contracts exacerbates the reliance on the amount of debt and managerial incentives for anticompetitive purposes. These results square with the well-documented features of firms’ debt structure and corporate governance in sectors plagued by collusion.