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Bankruptcy in Credit Chains


  • Cyril Monnet
  • Frederic Boissay


When firms use bank oans and trade credit,bankruptcy rules can magnify aggregate fluctuations.A priori,a rule where banks are senior is not appropriate to dampen fluctuations.It might force trade creditors into bankruptcy by triggering a ‘domino e ffect ’-when firms go bust because their clients default.Yet,banks are often senior.In this paper,we characterize the conditions under which such a rule limits the likelihood of bankruptcies.We model a credit chain where in equilibrium firms use trade credit and bank loans.Due to the credit chain,bank seniority minimizes the overall risk premium charged by trade creditors and banks.Although bank seniority magni fies the domino e ffect,we find it is optimal whenever there is a relatively high proportion of bad risks

Suggested Citation

  • Cyril Monnet & Frederic Boissay, 2004. "Bankruptcy in Credit Chains," Econometric Society 2004 North American Winter Meetings 133, Econometric Society.
  • Handle: RePEc:ecm:nawm04:133

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    References listed on IDEAS

    1. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    2. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-1141, December.
    3. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-937.
    4. Burkart, Mike & Ellingsen, Tore, 2002. "In-kind finance," LSE Research Online Documents on Economics 24940, London School of Economics and Political Science, LSE Library.
    5. Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 209-225, June.
    6. J. Stephen Ferris, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 243-270.
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    Cited by:

    1. Nico Dewaelheyns & Cynthia Hulle, 2008. "Legal reform and aggregate small and micro business bankruptcy rates: evidence from the 1997 Belgian bankruptcy code," Small Business Economics, Springer, vol. 31(4), pages 409-424, December.

    More about this item


    bankruptcy; trade credit; credit chains;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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