Cartel Stability in Times of Low Interest Rates

Severin Lenhard

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: We study the interest rate s effect on the stability of cartels. A low interest rate implies a high discount factor and thus increases cartel stability. If firms access the capital market, an additional effect comes into play: a low interest rate lowers investment costs, resulting in more profitable deviations from the collusive agreement. We propose a new measure for a cartel s stability regarding the two opposing effects. Stability is U-shaped in the interest rate. We test our theory using a dataset of 615 firms and find supporting evidence. We conclude that the current unusually low interest rate facilitates collusion.

Keywords: Collusion; Interest Rate; Repeated Game; Survival Analysis (search for similar items in EconPapers)
JEL-codes: C41 D43 K21 L40 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:ube:dpvwib:dp2104

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