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Trade Credits under Imperfect Enforcement: A Theory with a Test on Chinese Experience

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Author Info
Yanagawa, Noriyuki
Ito, Seiro
Watanabe, Mariko
Abstract

It is widely recognized that trade credit is an important financial mechanism, particularly in developing economies and transition economies where institutions are weak. This paper documents theoretical analysis and empirical accounts on what facilitates an effective supply of trade credit based on original surveys conducted in P.R. of China. Our theory predicts that trade volume and trade credit are increasing function of cash held by the buyer and enforcement technology of the seller. Furthermore, if the state sector’s enforcement technology is high, it has positive external effect to expand the volumes of trade credit and trades in the whole economy. From the data, we found that government made active commitment in enforcement of trade credit contract and the government owned firms are main supplier and receivers of trade credit, which suggest that enforcement by government and state sector were effective against presumptions in the previous literatures.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/137/1/ARRIDE_Discussion_No058_Ito.pdf
File Format: application/pdf
File Function: First version, 2006
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Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 58.

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Date of creation: Jun 2006
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Publication status: Published in IDE Discussion Paper. No. 58. 2006.6
Handle: RePEc:jet:dpaper:dpaper58

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Related research
Keywords: Law and finance Economic growth Incomplete contract Enforcement Trade policy Credit China

Find related papers by JEL classification:
G2 - Financial Economics - - Financial Institutions and Services
K0 - Law and Economics - - General
O5 - Economic Development, Technological Change, and Growth - - Economywide Country Studies
P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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This page was last updated on 2008-7-24.

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