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Interest Rates in Trade Credit Markets

  • Humberto Moreira
  • Walter Novaes
  • Klenio Barbosa

There is evidence that suppliers have private information about their customers' credit risk. Yet, interest rates in trade credit markets are usually industry-not-firm specific. Why? If the demand for intermediate products is inelastic, suppliers should raise interest rates until they reach their customers' outside option, which, by definition, cannot reflect information that is privy to suppliers. In contrast, a highly elastic demand induces suppliers with monopoly power to waive interest, making private information once more irrelevant to the trade-credit rate. By characterizing these two equilibria, we obtain implications on when trade-credit rates shouldn't vary with private information held by suppliers.

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 127.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:127
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  1. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
  2. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  3. Benjamin S. Wilner, 2000. "The Exploitation of Relationships in Financial Distress: The Case of Trade Credit," Journal of Finance, American Finance Association, vol. 55(1), pages 153-178, 02.
  4. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
  5. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
  6. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
  7. Gregory E. Elliehausen & John D. Wolken, 1993. "The demand for trade credit: an investigation of motives for trade credit use by small businesses," Staff Studies 165, Board of Governors of the Federal Reserve System (U.S.).
  8. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
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