Working Paper: CEPR ID: DP2036
Authors: John McMillan; Christopher Woodruff
Abstract: Trading relations in Vietnam's emerging private sector are shaped by two market frictions: the difficulty of locating trading partners and the absence of legal enforcement of contracts. Examining relational contracting, we find that a firm trusts its customer enough to offer credit when the customer faces high costs of finding an alternative supplier. A longer duration of trading relationship is associated with larger credit, as is prior information gathering. Customers identified through business networks receive more credit. These network effects are enduring, suggesting that networks are used to sanction defaulting customers.
Keywords: Trade credit; Networks; Vietnam
JEL Codes: D23; K12; P31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high search costs (D83) | more trade credit (F19) |
| supplier's information about customer (L81) | larger amounts of credit (E51) |
| longer trading relationships (F10) | larger amounts of credit (E51) |
| business networks (L14) | more trade credit (F19) |