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In-Kind Finance: A Theory of Trade Credit

  • Mike Burkart
  • Tore Ellingsen

It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes. Among other things, the model explains why trade credit has short maturity, why trade credit is more prevalent in less developed credit markets, and why accounts payable of large unrated firms are more countercyclical than those of small firms.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/0002828041464579
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 3 (June)
Pages: 569-590

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:3:p:569-590
Note: DOI: 10.1257/0002828041464579
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  21. Giuseppe Marotta, 2001. "Is trade credit more expensive than bank loans? Evidence from Italian firm-level data," Heterogeneity and monetary policy 0103, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.
  22. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2001. "Firms as financial intermediaries - evidence from trade credit data," Policy Research Working Paper Series 2696, The World Bank.
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