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Trade Credit: Suppliers as Debt Collectors and Insurance Providers

  • Vincente Cuñat

There are two fundamental puzzles about trade credit: why does it appear to be so expensive, and why do input suppliers engages in the business of lending money? This papers addresses and answers both questions analysing the interaction between the financial and the industrial aspects of the supplier-customer relationship. It examines, how, in a context of limited enforceability of contract5s, suppliers may have a comparative advantage over banks in lending to their customers because they hold the extra threat of stopping the supply of intermediate goods. Suppliers may also act as lenders of last resort, providing insurance against liquidity shocks they may endanger the survival of their customers. The relatively high implicit interest rates of trade credit result from the existence of default and insurance premia.

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp365.

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Date of creation: Nov 2000
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Handle: RePEc:fmg:fmgdps:dp365
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  1. Hart, O. & Moore, J., 1989. "Default And Renegotiation: A Dynamic Model Of Debt," Working papers 520, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. repec:tpr:qjecon:v:109:y:1994:i:4:p:841-79 is not listed on IDEAS
  3. Mitchell A. Petersen & Raghuram G. Rajan, 1996. "Trade Credit: Theories and Evidence," NBER Working Papers 5602, National Bureau of Economic Research, Inc.
  4. 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.
  5. Jeffrey H. Nilsen, 1999. "Trade Credit and the Bank Lending Channel," Working Papers 99.04, Swiss National Bank, Study Center Gerzensee.
  6. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series 233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  7. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  8. 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.
  9. Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(04), pages 643-657, September.
  10. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
  11. Brick, Ivan E & Fung, William K H, 1984. " Taxes and the Theory of Trade Debt," Journal of Finance, American Finance Association, vol. 39(4), pages 1169-76, September.
  12. Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
  13. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-41, December.
  14. repec:tpr:qjecon:v:96:y:1981:i:2:p:243-70 is not listed on IDEAS
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