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Trade Credit, Markups, and Relationships

Author

Listed:
  • Alvaro Garcia-Marin
  • Santiago Justel
  • Tim Schmidt-Eisenlohr

Abstract

Trade credit is the most important form of short-term finance for firms. In 2019, U.S. non-financial firms had about $4.5 trillion in trade credit outstanding equaling 21 percent of U.S. GDP. This paper documents two striking facts about trade credit use. First, firms with higher markups supply more trade credit. Second, trade credit use increases in relationship length, as firms often switch from cash in advance to trade credit but rarely away from trade credit. These two facts can be rationalized in a model where firms learn about their trading partners, sellers charge markups over production costs, and financial intermediation is costly. The model also shows that saving on financial intermediation costs provides a strong rationale for the dominance of trade credit. Using Chilean data at the firm-product-level and the trade-transaction level, we find support for all predictions of the model.

Suggested Citation

  • Alvaro Garcia-Marin & Santiago Justel & Tim Schmidt-Eisenlohr, 2019. "Trade Credit, Markups, and Relationships," CESifo Working Paper Series 7600, CESifo.
  • Handle: RePEc:ces:ceswps:_7600
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    References listed on IDEAS

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    7. Fischer, Christian, 2020. "Optimal payment contracts in trade relationships," DICE Discussion Papers 332, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    8. Tim Schmidt-Eisenlohr & Ryan Monarch, 2015. "Learning and the Value of Relationships in International Trade," 2015 Meeting Papers 668, Society for Economic Dynamics.
    9. Ryan Monarch & Tim Schmidt-Eisenlohr, 2017. "Learning and the Value of Trade Relationships," International Finance Discussion Papers 1218, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

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

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    More about this item

    Keywords

    trade credit; markups; financial intermediation; learning;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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