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Ensuring Sales: A Theory of Inter-firm Credit

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Author Info

  • Arup Daripa
  • Jeffrey Nilsen

Abstract

We propose a simple theory to account for the prevalence of interfirm credit at an interest rate of zero. A downstream firm trades off inventory holding costs against lost sales. Lost final sales impose a negative externality on the upstream firm. The solution requires a subsidy limited by the value of inputs. Allowing the downstream firm to pay with a delay is precisely such a solution. A reverse externality accounts for the use of prepayment. We clarify how input prices vary with such policies, and when trade credit/prepayment is more efficient than pure input price adjustments. (JEL D21, D62, D92, G31, L25)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.3.1.245
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 3 (2011)
Issue (Month): 1 (February)
Pages: 245-79

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Handle: RePEc:aea:aejmic:v:3:y:2011:i:1:p:245-79

Note: DOI: 10.1257/mic.3.1.245
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References

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  1. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
  2. Mitchell A. Petersen & Raghuram G. Rajan, . "Trade Credit: Theories and Evidence," CRSP working papers 322, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Simona Mateut & Spiros Bougheas & Paul Mizen, . "Corporate trade credit and inventories: New evidence of a tradeoff from accounts payable and receivable," Discussion Papers 08/09, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  4. Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(04), pages 643-657, September.
  5. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-53, February.
  6. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
  7. Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 243-70, May.
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Cited by:
  1. Simona Mateut & Paul Mizen & Ydriss Ziane, . "No Going Back: The Interactions Between Processed Inventories and Trade Credit," Discussion Papers 11/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Simona Mateut & Paul Mizen & Ydriss Ziane, . "No Going Back: How the Production Process Affects Access to Short-term Credit," Discussion Papers 12/14, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. Galya Taseva, 2012. "Overdue Intercorporate Debts in Bulgaria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 76-94.
  4. Galia Taseva, 2012. "Trade Credit Terms between the Firms in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 110-136.
  5. Marta Troya-Martinez, 2013. "Vertical Relational Contracts and Trade Credit," Economics Series Working Papers 648, University of Oxford, Department of Economics.
  6. Jinjarak, Yothin, 2013. "Supply Chains and Credit-Market Shocks: Some Implications for Emerging Markets," ADBI Working Papers 443, Asian Development Bank Institute.
  7. Caglayan, Mustafa & Maioli, Sara & Mateut, Simona, 2012. "Inventories, sales uncertainty, and financial strength," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2512-2521.
  8. Harald Badinger & Thomas Url, 2012. "Export Credit Guarantees and Export Performance. Evidence from Austrian Firm-Level Data," WIFO Working Papers 423, WIFO.
  9. Mateut, Simona & Zanchettin, Piercarlo, 2013. "Credit sales and advance payments: Substitutes or complements?," Economics Letters, Elsevier, vol. 118(1), pages 173-176.
  10. TSURUTA Daisuke & UCHIDA Hirofumi, 2013. "Real Driver of Trade Credit," Discussion papers 13037, Research Institute of Economy, Trade and Industry (RIETI).
  11. Simona Mateut, . "Reverse trade credit - the use of prepayments by French firms," Discussion Papers 11/12, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  12. Alessandra Guariglia & Simona Mateut, . "Political affiliation and trade credit extension by Chinese firms," Discussion Papers 11/12, University of Nottingham, GEP.

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