Working Paper: CEPR ID: DP3536
Authors: Mike Burkart; Tore Ellingsen
Abstract: It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Suppliers, therefore, may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes depending on, amongst other things, the borrower?s wealth. The model also explains why firms both take and give costly trade credit even when the borrowing rate exceeds the lending rate. Finally, the model suggests reasons for why trade credit is more prevalent in less developed credit markets and for why accounts payable of large unrated firms are more countercyclical than those of small firms.
Keywords: credit rationing; input monitoring; trade credit
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| opportunistic borrowers find it less profitable to divert inputs than cash (D22) | suppliers lend more liberally than banks (G21) |
| trade credit can enhance the supply of bank credit (E51) | reduces moral hazard (G52) |
| availability of trade credit (F19) | increased investment incentives (E22) |
| trade credit becomes more prevalent in less developed credit markets (F65) | increases reliance on trade credit as a funding source (G32) |
| accounts payable for large unrated firms are more countercyclical (G32) | larger firms can better manage credit constraints during economic downturns (D25) |