Informal Trade Credit Guarantee Networks

Provision of trade credit via networks provides a way for producers in many industries who face uncertain demand to finance production when they are in the need for such thing. The readymade garment manufacturing industry of Metiabruz, Kolkata, is one such industry where the suppliers of input often provide trade credit to producers with whom they have long-term business relationships and belong to their direct trade credit networks. One of the most interesting and unique feature of this industry is that suppliers of input often provide trade credit to producers against guarantees from people they find acceptable in addition to direct provision of trade credit. Guarantors usually belong to input suppliers’ direct networks and produce readymade garments. This paper explores the architecture of trade credit guarantee networks of producers who act as guarantors for each other. This paper considers that the cost of forming a bilateral link is positive and the benefit is frictionless. This paper finds that only cycle-free networks, i.e. star network, tree networks, line networks, etc., are pair-wise stable and efficient.