Debt and Input Misallocation

  • Published: Apr 30, 2012
  • Pages: 795-816
  • DOI: 10.1111/j.1540-6261.1990.tb05106.x


We investigate a class of agency costs of debt that arise because debt financing affects the firm's incentives to use inputs efficiently. A methodology for estimating this class of costs is presented and applied to a major industry, air transport. Our results are consistent with agency models that predict a decrease in efficiency as the debt increases. A part of the loss of efficiency that we identify is attributable to the greater use by levered firms of inputs that can be monitored and are collateralizable.

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