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Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships

Author

Listed:
  • Raymond Fisman

    (Columbia University GSB, BREAD, and NBER)

  • Mayank Raturi

    (Swiss Re)

Abstract

Previous work has claimed that monopoly power facilitates the provision of credit, because monopolists are better able to enforce payment. Here, we argue that if relationship-specific investments are required by borrowers to establish creditworthiness, monopoly power may reduce credit provision because holdup problems ex post will deter borrowers from investing in establishing creditworthiness. Empirically, we examine the relationship between monopoly power and credit provision, using data on the supply relationships of firms in five African countries. Consistent with the up-front investment story, we find that monopoly power is negatively associated with credit provision, and that this correlation is stronger in older supplier relationships. Because the data include several observations per firm, we are able to utilize firm fixed effects, thus netting out unobserved firm characteristics that may have been driving results in earlier studies. 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Raymond Fisman & Mayank Raturi, 2004. "Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 345-352, February.
  • Handle: RePEc:tpr:restat:v:86:y:2004:i:1:p:345-352
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    References listed on IDEAS

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    1. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships and Informal Credit in Vietnam," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1285-1320.
    2. 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.
    3. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.),Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318, Elsevier.
    4. Parikshit Ghosh & Debraj Ray, 1996. "Cooperation in Community Interaction Without Information Flows," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 491-519.
    5. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
    6. Fafchamps, Marcel, 1997. "Trade credit in Zimbabwean manufacturing," World Development, Elsevier, vol. 25(5), pages 795-815, May.
    7. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-937.
    8. Gary Chamberlain, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 225-238.
    9. Fafchamps, Marcel, 2000. "Ethnicity and credit in African manufacturing," Journal of Development Economics, Elsevier, vol. 61(1), pages 205-235, February.
    10. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-123, May.
    11. Fisman Raymond J, 2003. "Ethnic Ties and the Provision of Credit: Relationship-Level Evidence from African Firms," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-21, October.
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    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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