There are two fundamental puzzles about trade credit: why does it appear
to be so expensive,and why do input suppliers engage in the business of
lending money? This paper 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 contracts, suppliers may have a comparative advantage
over banks in lending to their customers because they hold the extra
threat ...
There are two fundamental puzzles about trade credit: why does it appear
to be so expensive,and why do input suppliers engage in the business of
lending money? This paper 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 contracts, 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 that 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. The implications of the model are
examined empirically using parametric and nonparametric techniques on a
panel of UK firms.
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