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Self-enforcing trade credit

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  • Troya-Martinez, Marta

Abstract

Trade credit plays a very important role in inter-firm transactions. Because formal contracts are often unavailable, it is granted within an ongoing relationship. We characterize the optimal self-enforcing contract, when the ability to repay is unknown to the supplier and the threat of trade suspension is used to discipline the buyer. The optimal contract resembles a debt contract: if the fixed repayment is met, the contract is renewed. Otherwise, the supplier demands the highest feasible repayment and suspends trade for some time. The length of the trade suspension is contingent on the repayment. We provide a novel explanation for why the quantity is undersupplied, even when a repayment is met.

Suggested Citation

  • Troya-Martinez, Marta, 2017. "Self-enforcing trade credit," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 333-357.
    • Handle: RePEc:eee:indorg:v:52:y:2017:i:c:p:333-357
    DOI: 10.1016/j.ijindorg.2017.03.001
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    Cited by:

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    2. Fischer, Christian, 2020. "Optimal payment contracts in trade relationships," MPRA Paper 101956, University Library of Munich, Germany.
    3. Cheung, Adrian (Waikong) & Pok, Wee Ching, 2019. "Corporate social responsibility and provision of trade credit," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(3).

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    More about this item

    Keywords

    Limited enforcement; Trade credit; Imperfect monitoring; Debt contract;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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