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Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships

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  • Raymond Fisman

    (Columbia University GSB, BREAD, and NBER)

  • Mayank Raturi

    (Swiss Re)

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    Abstract

    Previous work has claimed that monopoly power facilitates the provision of credit, because monopolists are better able to enforce payment. Here, we argue that if relationship-specific investments are required by borrowers to establish creditworthiness, monopoly power may reduce credit provision because holdup problems ex post will deter borrowers from investing in establishing creditworthiness. Empirically, we examine the relationship between monopoly power and credit provision, using data on the supply relationships of firms in five African countries. Consistent with the up-front investment story, we find that monopoly power is negatively associated with credit provision, and that this correlation is stronger in older supplier relationships. Because the data include several observations per firm, we are able to utilize firm fixed effects, thus netting out unobserved firm characteristics that may have been driving results in earlier studies. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics and Statistics.

    Volume (Year): 86 (2004)
    Issue (Month): 1 (February)
    Pages: 345-352

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    Handle: RePEc:tpr:restat:v:86:y:2004:i:1:p:345-352

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    Cited by:
    1. Fabbri, Daniela & Klapper, Leora, 2008. "Market power and the matching of trade credit terms," Policy Research Working Paper Series, The World Bank 4754, The World Bank.
    2. Bigsten, Arne & Soderbom, Mans, 2005. "What have we learned from a decade of manufacturing enterprise surveys in Africa ?," Policy Research Working Paper Series, The World Bank 3798, The World Bank.
    3. Cull, Robert & Lixin Colin Xu & Tian Zhu, 2007. "Formal finance and trade credit during China's transition," Policy Research Working Paper Series, The World Bank 4204, The World Bank.
    4. Kyle Hyndman & Giovanni Serio, 2007. "Competition and Inter-Firm Credit: Theory and Evidence from Firm-level Data in Indonesia," Departmental Working Papers, Southern Methodist University, Department of Economics 0702, Southern Methodist University, Department of Economics.
    5. Leora Klapper & Luc Laeven & Raghuram Rajan, 2012. "Trade Credit Contracts," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 25(3), pages 838-867.
    6. Hirofumi Uchida & Gregory F. Udell & Wako Watanabe, 2006. "Are Trade Creditors Relationship Lenders?," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 06026, Research Institute of Economy, Trade and Industry (RIETI).
    7. Klapper, Leora, 2005. "The role of factoring for financing small and medium enterprises," Policy Research Working Paper Series, The World Bank 3593, The World Bank.
    8. Van Horen, Neeltje, 2004. "Trade Credit as a Competitiveness Tool;Evidence from Developing Countries," MPRA Paper 2792, University Library of Munich, Germany, revised Mar 2005.
    9. Swinnen, Johan F.M. & Vandeplas, Anneleen, 2007. "Contracting, Competition, and Rent Distribution Theory and Empirical Evidence from Developing and Transition Countries," 103rd Seminar, April 23-25, 2007, Barcelona, Spain, European Association of Agricultural Economists 9413, European Association of Agricultural Economists.
    10. Van Horen, Neeltje, 2007. "Customer market power and the provision of trade credit : evidence from Eastern Europe and Central Asia," Policy Research Working Paper Series, The World Bank 4284, The World Bank.

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