Debt and Creative Destruction: Why Could Subsidizing Corporate Debt be Optimal? / Zhiguo He, Gregor Matvos.

Format:

Book

Author/Creator:

He, Zhiguo.

Contributor:

National Bureau of Economic Research.

Matvos, Gregor.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17920.

NBER working paper series no. w17920

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

We illustrate the welfare benefit of tax subsidies to corporate debt financing. Two firms engage in a socially wasteful competition for survival in a declining industry. Firms differ on two dimensions: exogenous productivity and endogenously chosen amount of debt financing, resulting in a two dimensional war of attrition. Debt financing increases incentives to exit, which, while socially beneficial, is costly for the firm. Therefore the planner can increase welfare by subsidizing debt financing. The duration of industry distress determines the tradeoff between the welfare benefit illustrated in our model and the costs of subsidizing corporate debt from the existing literature. Our theory also sheds light on why the IRS considers "conflict of interest" as one of the key determinants in identifying securities that are qualified for tax-benefits.

Notes:

Print version record

March 2012.