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Self-Enforcing Trade Credit

Author

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  • Marta Troya-Martinez

    (New Economic School)

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

  • Marta Troya-Martinez, 2017. "Self-Enforcing Trade Credit," Working Papers w0240, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0240
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    File URL: https://www.nes.ru/files/Preprints-resh/WP240.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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).
    2. Fischer, Christian, 2020. "Optimal payment contracts in trade relationships," DICE Discussion Papers 332, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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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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