IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/7636.html
   My bibliography  Save this paper

Vertical Relations under Credit Constraints

Author

Listed:
  • Nocke, Volker
  • Thanassoulis, John

Abstract

We model the impact credit constraints and market risk have on the vertical relationships between firms in the supply chain. Firms which might face credit constraints in future investments become endogenously risk averse when accumulating pledgable income. In the short run, the optimal supply contract therefore involves risk sharing, thereby inducing double marginalization. Credit constraints thus result in higher retail prices. The model offers a concise explanation for several empirical regularities of firm behavior. We demonstrate an intrinsic complementarity between supply and lending providing a theory of finance arms of major suppliers; a monetary transmission mechanism linking the cost of borrowing with short-run retail prices that can help explain the price puzzle in macroeconomics; a theory of countervailing power based on credit constraints; and a motive for outsourcing supply (or distribution) in the face of market risk.

Suggested Citation

  • Nocke, Volker & Thanassoulis, John, 2010. "Vertical Relations under Credit Constraints," CEPR Discussion Papers 7636, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7636
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP7636
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    2. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    3. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    4. Carlton, Dennis W, 1979. "Vertical Integration in Competitive Markets under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 189-209, March.
    5. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    6. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    7. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, vol. 86(4), pages 703-725, September.
    8. Tasneem Chipty & Christopher M. Snyder, 1999. "The Role Of Firm Size In Bilateral Bargaining: A Study Of The Cable Television Industry," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 326-340, May.
    9. Eugenio Gaiotti & Alessandro Secchi, 2004. "Is there a cost channel of monetary policy transmission? An investigation into the pricing behaviour of 2,000 firms," Temi di discussione (Economic working papers) 525, Bank of Italy, Economic Research and International Relations Area.
    10. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    11. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
    12. Vicente Cuñat, 2007. "Trade Credit: Suppliers as Debt Collectors and Insurance Providers," Review of Financial Studies, Society for Financial Studies, vol. 20(2), pages 491-527.
    13. Oliver D. Hart, 1983. "Optimal Labour Contracts under Asymmetric Information: An Introduction," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 3-35.
    14. Mark Carey & Mitch Post & Steven A. Sharpe, 1998. "Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting," Journal of Finance, American Finance Association, vol. 53(3), pages 845-878, June.
    15. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Léautier, Thomas-Olivier & Rochet, Jean-Charles, 2014. "On the strategic value of risk management," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 153-169.
    2. Meghna Dutta & Niladri Sekhar Dhar, 2021. "Property Rights Documentation in Determining Credit Availability for Informal Firms: A Study of Indian Firms," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 19(1), pages 123-138, March.
    3. Nicolas Pasquier & Olivier Bonroy & Alexis Garapin, 2022. "Risk aversion and equilibrium selection in a vertical contracting setting: an experiment," Theory and Decision, Springer, vol. 93(4), pages 585-614, November.
    4. Motta, Massimo & Hansen, Stephen, 2012. "Vertical Exclusion with Endogenous Competiton Externalities," CEPR Discussion Papers 8982, C.E.P.R. Discussion Papers.
    5. John Thanassoulis, 2012. "The Case for Intervening in Bankers’ Pay," Journal of Finance, American Finance Association, vol. 67(3), pages 849-895, June.
    6. Chiara Fumagalli & Massimo Motta & Emanuele Tarantino, 2020. "Shelving or developing? The acquisition of potential competitors under financial constraints," Economics Working Papers 1735, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    8. Debarati Ghosh & Meghna Dutta, 2023. "Credit Constraints and Increased Firm-Level Production Fragmentation: Evidence from India," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 15(1), pages 93-108, January.
    9. Dan Bernhardt & Mahdi Rastad, 2016. "Collusion Under Risk Aversion and Fixed Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 64(4), pages 808-834, December.
    10. Lømo, Teis Lunde, 2015. "Risk sharing mitigates opportunism in vertical contracting," Working Papers in Economics 10/15, University of Bergen, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, July.
    2. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2011. "Corporate financial and investment policies when future financing is not frictionless," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 675-693, June.
    3. Dasgupta, Sudipto & Sengupta, Kunal, 2007. "Corporate liquidity, investment and financial constraints: Implications from a multi-period model," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 151-174, April.
    4. Keuschnigg, Christian & Ribi, Evelyn, 2010. "Profit Taxation, Innovation and the Financing of Heterogeneous Firms," CEPR Discussion Papers 7626, C.E.P.R. Discussion Papers.
    5. Magnus Lundin & Nils Gottfries & Charlotte Bucht & Tomas Lindström, 2009. "Price and Investment Dynamics: Theory and Plant‐Level Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 907-934, August.
    6. Villacorta, Alonso, 2018. "Business cycles and the balance sheets of the financial and non-financial sectors," ESRB Working Paper Series 68, European Systemic Risk Board.
    7. repec:dau:papers:123456789/11029 is not listed on IDEAS
    8. Jean‐Noël Barrot & Ramana Nanda, 2020. "The Employment Effects of Faster Payment: Evidence from the Federal Quickpay Reform," Journal of Finance, American Finance Association, vol. 75(6), pages 3139-3173, December.
    9. Gregory S. Crawford & Nicola Pavanini & Fabiano Schivardi, 2018. "Asymmetric Information and Imperfect Competition in Lending Markets," American Economic Review, American Economic Association, vol. 108(7), pages 1659-1701, July.
    10. repec:dau:papers:123456789/6395 is not listed on IDEAS
    11. Peydró, José-Luis & Polo, Andrea & Sette, Enrico, 2021. "Monetary policy at work: Security and credit application registers evidence," Journal of Financial Economics, Elsevier, vol. 140(3), pages 789-814.
    12. Keuschnigg, Christian & Ribi, Evelyn, 2009. "Profit Taxation and Finance Constraints," CEPR Discussion Papers 7433, C.E.P.R. Discussion Papers.
    13. Giovannoni, Francesco & de Dios Tena, Juan, 2008. "Market concentration, macroeconomic uncertainty and monetary policy," European Economic Review, Elsevier, vol. 52(6), pages 1097-1123, August.
    14. Christian Keuschnigg & Evelyn Ribi, 2013. "Profit taxes and financing constraints," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(5), pages 808-826, October.
    15. Bougheas, Spiros & Mizen, Paul & Yalcin, Cihan, 2006. "Access to external finance: Theory and evidence on the impact of monetary policy and firm-specific characteristics," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 199-227, January.
    16. Smets, Frank & Collard, Fabrice & Boissay, Frédéric, 2013. "Booms and systemic banking crises," Working Paper Series 1514, European Central Bank.
    17. Peter Egger & Christian Keuschnigg, 2015. "Innovation, Trade, and Finance," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 121-157, May.
    18. Marvin J. Barth III & Valerie A. Ramey, 2002. "The Cost Channel of Monetary Transmission," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 199-256, National Bureau of Economic Research, Inc.
    19. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    20. Hubbard, R Glenn & Kuttner, Kenneth N & Palia, Darius N, 2002. "Are There Bank Effects in Borrowers' Costs of Funds? Evidence from a Matched Sample of Borrowers and Banks," The Journal of Business, University of Chicago Press, vol. 75(4), pages 559-581, October.
    21. Jorge, José, 2009. "Why do bank loans react with a delay to shifts in interest rates? A bank capital explanation," Economic Modelling, Elsevier, vol. 26(5), pages 799-806, September.
    22. Jean Tirole, 2011. "Illiquidity and All Its Friends," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 287-325, June.

    More about this item

    Keywords

    Countervailing power; Double marginalization; Finance arms; Financial companies; Market risk; Monetary transmission mechanism; Outsourcing; Price puzzle; Risk aversion; Risk sharing;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7636. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.