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Towards a Theory of Trade Finance

  • Tim Schmidt-Eisenlohr

Shipping goods internationally is risky and takes time.� To allocate risk and to finance the time gap between production and sale, a range of payment contracts is utilized.� I study the optimal choice between these payment contracts and their implications for trade.� The equilibrium contract is determined by financial market characteristics and contracting environments in both the source and the destination country.� Trade increases in enforcement probabilities and decreases in financing costs proportional to the time needed for trade.� Empirical results from gravity regressions are in line with the model, highly significant and economically relevant.� They suggest that importer finance is as important for trade as exporter finance.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 583.

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Date of creation: 01 Dec 2011
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Handle: RePEc:oxf:wpaper:583
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