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Ensuring Sales: A Theory of Inter-firm Credit

Author

Listed:
  • Arup Daripa
  • Jeffrey Nilsen

Abstract

We propose a simple theory to account for the prevalence of interfirm credit at an interest rate of zero. A downstream firm trades off inventory holding costs against lost sales. Lost final sales impose a negative externality on the upstream firm. The solution requires a subsidy limited by the value of inputs. Allowing the downstream firm to pay with a delay is precisely such a solution. A reverse externality accounts for the use of prepayment. We clarify how input prices vary with such policies, and when trade credit/prepayment is more efficient than pure input price adjustments. (JEL D21, D62, D92, G31, L25)

Suggested Citation

  • Arup Daripa & Jeffrey Nilsen, 2011. "Ensuring Sales: A Theory of Inter-firm Credit," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 245-279, February.
  • Handle: RePEc:aea:aejmic:v:3:y:2011:i:1:p:245-79 Note: DOI: 10.1257/mic.3.1.245
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    References listed on IDEAS

    as
    1. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-253, February.
    2. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, June.
    3. Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(04), pages 643-657, September.
    4. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    5. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, pages 569-590.
    6. Koulovatianos, Christos & Mirman, Leonard J. & Santugini, Marc, 2009. "Optimal growth and uncertainty: Learning," Journal of Economic Theory, Elsevier, pages 280-295.
    7. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, pages 569-590.
    8. Bougheas, Spiros & Mateut, Simona & Mizen, Paul, 2009. "Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 300-307, February.
    9. J. Stephen Ferris, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 243-270.
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    Citations

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    Cited by:

    1. Ellingsen, Tore & Jacobson, Tor & von Schedvin, Erik, 2016. "Trade Credit: Contract-Level Evidence Contradicts Current Theories," Working Paper Series 315, Sveriges Riksbank (Central Bank of Sweden).
    2. Ganeshan Wignaraja, 2013. "Regional Trade Agreements and Enterprises in Southeast Asia," Trade Working Papers 23718, East Asian Bureau of Economic Research.
    3. Mateut, Simona & Zanchettin, Piercarlo, 2013. "Credit sales and advance payments: Substitutes or complements?," Economics Letters, Elsevier, pages 173-176.
    4. Harald Badinger & Thomas Url, 2013. "Export Credit Guarantees and Export Performance: Evidence from Austrian Firm-level Data," The World Economy, Wiley Blackwell, vol. 36(9), pages 1115-1130, September.
    5. Adalto Barbaceia Gonçalves & Rafael Schiozer & Hsia Hua Sheng, 2018. "Trade Credit and Product Market Power during a Financial Crisis," Working Papers CEB 18-004, ULB -- Universite Libre de Bruxelles.
    6. Simon D. Smith & Martin Forster, 2013. "‘The Curse of the Caribbean’? Agency’s impact on the efficiency of sugar estates in St.Vincent and the Grenadines, 1814-1829," Oxford University Economic and Social History Series _112, Economics Group, Nuffield College, University of Oxford.
    7. Mateut, Simona, 2014. "Reverse trade credit or default risk? Explaining the use of prepayments by firms," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 303-326.
    8. Caglayan, Mustafa & Maioli, Sara & Mateut, Simona, 2012. "Inventories, sales uncertainty, and financial strength," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2512-2521.
    9. Galia Taseva, 2012. "Trade Credit Terms between the Firms in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 110-136.
    10. Alessandra Guariglia & Simona Mateut, "undated". "Political affiliation and trade credit extension by Chinese firms," Discussion Papers 11/12, University of Nottingham, GEP.
    11. Simona Mateut & Thanaset Chevapatrakul, 2016. "Customer financing, bargaining power and trade credit uptake," Discussion Papers 2016/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    12. TSURUTA Daisuke & UCHIDA Hirofumi, 2013. "Real Driver of Trade Credit," Discussion papers 13037, Research Institute of Economy, Trade and Industry (RIETI).
    13. Spiros Bougheas & Rod Falvey, "undated". "The Impact of Financial Market Frictions on Trade Flows, Capital Flows and Economic Development," Discussion Papers 11/01, University of Nottingham, GEP.
    14. Galya Taseva, 2012. "Overdue Intercorporate Debts in Bulgaria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 76-94.
    15. Tsuruta, Daisuke, 2015. "Bank loan availability and trade credit for small businesses during the financial crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 40-52.
    16. Anna Białek-Jaworska & Natalia Nehrebecka, 2015. "Rola kredytu handlowego w finansowaniu przedsiębiorstw," Gospodarka Narodowa, Warsaw School of Economics, issue 5, pages 33-64.
    17. Chen, Xiangfeng, 2015. "A model of trade credit in a capital-constrained distribution channel," International Journal of Production Economics, Elsevier, vol. 159(C), pages 347-357.
    18. Simona Mateut & Thanaset Chevapatrakul, 2017. "Customer financing, bargaining power and trade credit uptake," Discussion Papers 2017/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    19. Bedendo, Mascia & Garcia-Appendini, Emilia & Siming, Linus, 2017. "Cultural Preferences and the Choice between Formal and Informal Financing," Working Papers on Finance 1707, University of St. Gallen, School of Finance.
    20. Spiros Bougheas & Richard Upward, 2013. "Endogenous participation in imperfect labor and capital markets," Economics Bulletin, AccessEcon, pages 2454-2464.
    21. Simona Mateut, "undated". "Reverse trade credit - the use of prepayments by French firms," Discussion Papers 11/12, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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