Trade Credit and Financial Amplification” joint with G. Bornstein
Abstract:
In most countries, suppliers of intermed iate goods are also the main providers of short term financing to their cus tomers via trade credit contracts. This paper builds a model where these in ter-firm financial linkages arise endogenously and uses it to understand ho w trade credit responds to financial shocks and affects their propagation. In the model, trade credit is the outcome of a long-term contract between f irms in a production line: downstream firms have incentives to repay their debt when the relationship with their supplier is valuable, and the higher is the value of such relationship the more trade credit the pair can sustai n. In addition, production lines that can sustain more trade credit are bet ter able to smooth the impact of financial shocks, provided that suppliers have enough borrowing capacity themselves. Using Italian data, we show that the model can rationalize the observed differences across industries in tr ade credit and in their performance during the Great Recession.
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