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Towards a Theory of Trade Finance

  • Tim Schmidt-Eisenlohr

Shipping goods internationally is risky and takes time. To allocate risk and to finance the time gap between production and sale, a range of payment contracts is utilized. I study the optimal choice between these payment contracts considering one shot transactions, repeated transactions and implications for trade. The equilibrium contract is determined by financial market characteristics and contracting environments in both the source and the destination country. Trade increases in enforcement probabilities and decreases in financing costs proportional to the time needed for trade. Empirical results from gravity regressions are in line with the model, highly significant and economically relevant.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3414.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3414
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