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Vertical Relations under Credit Constraints

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  • Nocke, Volker
  • Thanassoulis, John

Abstract

We model the impact credit constraints and market risk have on the vertical relationships between firms in the supply chain. Firms which might face credit constraints in future investments become endogenously risk averse when accumulating pledgable income. In the short run, the optimal supply contract therefore involves risk sharing, thereby inducing double marginalization. Credit constraints thus result in higher retail prices. The model offers a concise explanation for several empirical regularities of firm behavior. We demonstrate an intrinsic complementarity between supply and lending providing a theory of finance arms of major suppliers; a monetary transmission mechanism linking the cost of borrowing with short-run retail prices that can help explain the price puzzle in macroeconomics; a theory of countervailing power based on credit constraints; and a motive for outsourcing supply (or distribution) in the face of market risk.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7636.

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Date of creation: Jan 2010
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Handle: RePEc:cpr:ceprdp:7636

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Related research

Keywords: countervailing power; double marginalization; finance arms; financial companies; market risk; monetary transmission mechanism; outsourcing; price puzzle; risk aversion; risk sharing; vertical contracting;

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  1. Eugenio Gaiotti & Alessandro Secchi, 2004. "Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2,000 firms," Macroeconomics 0412010, EconWPA.
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Cited by:
  1. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.

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