TY  - JOUR
AU  - He,Zhiguo
AU  - Matvos,Gregor
TI  - Debt and Creative Destruction: Why Could Subsidizing Corporate Debt be Optimal?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17920
PY  - 2012
Y2  - March 2012
UR  - http://www.nber.org/papers/w17920
L1  - http://www.nber.org/papers/w17920.pdf
N1  - Author contact info:
Zhiguo He
University of Chicago
Booth School of Business
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/834-3769
E-Mail: zhiguo.he@chicagobooth.edu

Gregor Matvos
Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773-834-3188
E-Mail: gmatvos@chicagobooth.edu
AB  - 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.
ER  -