Gregor Matvos (Booth School of Business, University of Chicago) presenting 'Debt and Creative Destruction: Why is Subsidizing Corporate Debt Optimal?', a theory that rationalizes the government subsidy to corporate debt financing. Two firms compete for survival in a declining industry in a two dimensional war of attrition, in which one dimension, financing, is endogenous. The conflict of interest between equity-and debt-holders is socially desirable by expediting firm exit. Individual firms internalize the cost of this conflict, but not its benefit, which accrues to the surviving firm. Debt financing therefore exhibits positive externalities: in the second best solution the social planner subsidizes debt and therefore the conflict of interest. The theory also explains why the debt tax shield is implemented as a corporate tax deduction and why IRS considers 'conflict of interest' as one of the key determinants in identifying securities that are qualified for tax-benefit.