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Towards a Theory of Trade Finance

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  • Tim Schmidt-Eisenlohr

Abstract

Shipping goods internationally is risky and takes time. To allocate risk and to finance the time gap between production and sale, a range of payment contracts is utilized. I study the optimal choice between these payment contracts considering one shot transactions, repeated transactions and implications for trade. The equilibrium contract is determined by financial market characteristics and contracting environments in both the source and the destination country. Trade increases in enforcement probabilities and decreases in financing costs proportional to the time needed for trade. Empirical results from gravity regressions are in line with the model, highly significant and economically relevant.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3414.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3414

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Keywords: trade finance; payment contracts; trade patterns; distance interaction;

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References

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Cited by:
  1. Rudolfs Bems & Robert C. Johnson & Kei-Mu Yi, 2013. "The Great Trade Collapse," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 5(1), pages 375-400, 05.
  2. Tim Schmidt-Eisenlohr, 2011. "Towards a Theory of Trade Finance," CESifo Working Paper Series 3414, CESifo Group Munich.
  3. Bricongne, J-C. & Fontagné, L. & Gaulier, G. & Taglioni, D. & Vicard, V., 2009. "Firms and the global crisis: French exports in the turmoil," Working papers, Banque de France 265, Banque de France.
  4. Pol Antràs & C. Fritz Foley, 2011. "Poultry in Motion: A Study of International Trade Finance Practices," NBER Working Papers 17091, National Bureau of Economic Research, Inc.
  5. Nicolas Berman & José de Sousa & Philippe Martin & Thierry Mayer, 2012. "Time to ship during financial crises," Working Papers 2012-25, CEPII research center.
  6. Koen van der Veer, 2010. "The Private Credit Insurance Effect on Trade," DNB Working Papers, Netherlands Central Bank, Research Department 264, Netherlands Central Bank, Research Department.
  7. Nicolas Berman & Philippe Martin, 2012. "The Vulnerability of Sub-Saharan Africa to Financial Crises: The Case of Trade," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 60(3), pages 329-364, September.
  8. Tibor Besedeš & Byung–Cheol Kim & Volodymyr Lugovskyy, 2011. "Export Growth and Credit Constraints," CeFiG Working Papers, Center for Firms in the Global Economy 16, Center for Firms in the Global Economy, revised 16 Oct 2011.

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