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Competition and Inter-Firm Credit: Theory and Evidence from Firm-level Data in Indonesia

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  • Kyle Hyndman

    ()
    (SMU)

  • Giovanni Serio

    ()
    (Goldman Sachs)

Abstract

Using firm-level data we investigate the relationship between trade credit and suppliers’ market structure and find an inverted U-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This “big jump” arises because monopolists are more likely to not offer any trade credit than firms in competitive environments. Our model exploits the fundamentally different nature between cash and trade credit sales, arguing that firms are unable to commit ex ante to a trade credit price. We show that monopolists will often sell only on cash, while credit is always provided in competitive environments.

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Bibliographic Info

Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0702.

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Date of creation: Jan 2007
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Handle: RePEc:smu:ecowpa:0702

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Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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Keywords: Trade Credit; Competition; Development; Industrial Organization.;

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References

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  1. 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.
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Citations

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Cited by:
  1. Watanabe, Mariko, 2011. "Competition of the mechanisms : how Chinese home appliance firms coped with default risk of trade credit?," IDE Discussion Papers 312, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  2. Maho Shiraishi & Go Yano, 2010. "Trade credit in China in the early 1990s," Economic Change and Restructuring, Springer, vol. 43(3), pages 221-251, August.
  3. Nakhoda, Aadil, 2012. "The influence of financial leverage of firms on their international trading activities," MPRA Paper 35765, University Library of Munich, Germany.

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