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Trade Credit and Relationships

Author

Listed:
  • Felipe Benguria
  • Alvaro Garcia-Marin
  • Tim Schmidt-Eisenlohr
Abstract
Most domestic and international firm-to-firm transactions rely on trade credit, where sellers grant buyers time to pay the invoice after delivery. Exploiting Chilean and Colombian transaction-level trade data, this paper documents new facts about trade credit use: trade credit use increases with firm-to-firm relationship length, an effect that is stronger for destination (source) countries with weaker (stronger) contract enforcement and for trade in differentiated goods. The paper develops a model featuring enforcement frictions, learning, and a financing cost advantage of trade credit that can rationalize these patterns. Initially, as there is uncertainty about the reliability of the trading partner, payment risk is a key factor limiting the use of trade credit. Through learning, this uncertainty resolves within a relationship over time. For older relationships, the payment choice is, therefore, only determined by the financing cost advantage of trade credit, and all relationships rely on trade credit in the long run. The paper thereby suggests a new benefit of long-term trade relationships: the ability to save on financing costs through the use of trade credit.

Suggested Citation

  • Felipe Benguria & Alvaro Garcia-Marin & Tim Schmidt-Eisenlohr, 2023. "Trade Credit and Relationships," CESifo Working Paper Series 10465, CESifo.
    • Handle: RePEc:ces:ceswps:_10465
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp10465.pdf
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    References listed on IDEAS

    as
    1. Paulo Bastos & Daniel A. Dias & Olga A. Timoshenko, 2018. "Learning, prices and firm dynamics," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(4), pages 1257-1311, November.
    2. Kalina Manova, 2013. "Credit Constraints, Heterogeneous Firms, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 711-744.
    3. Schmidt-Eisenlohr, Tim, 2013. "Towards a theory of trade finance," Journal of International Economics, Elsevier, vol. 91(1), pages 96-112.
    4. JaeBin Ahn & Mary Amiti & David E. Weinstein, 2011. "Trade Finance and the Great Trade Collapse," American Economic Review, American Economic Association, vol. 101(3), pages 298-302, May.
    5. Rocco Macchiavello & Ameet Morjaria, 2015. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," American Economic Review, American Economic Association, vol. 105(9), pages 2911-2945, September.
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    8. Andreas Hoefele & Tim Schmidt‐Eisenlohr & Zhihong Yu, 2016. "Payment choice in international trade: Theory and evidence from cross‐country firm‐level data," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(1), pages 296-319, February.
    9. Fernando Leibovici, 2021. "Financial Development and International Trade," Journal of Political Economy, University of Chicago Press, vol. 129(12), pages 3405-3446.
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    11. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2015. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 333-359.
    12. Daniel A. Ackerberg & Kevin Caves & Garth Frazer, 2015. "Identification Properties of Recent Production Function Estimators," Econometrica, Econometric Society, vol. 83, pages 2411-2451, November.
    13. Benguria, Felipe, 2021. "The matching and sorting of exporting and importing firms: Theory and evidence," Journal of International Economics, Elsevier, vol. 131(C).
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    Cited by:

    1. Monarch, Ryan & Schmidt-Eisenlohr, Tim, 2023. "Longevity and the value of trade relationships," Journal of International Economics, Elsevier, vol. 145(C).

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    More about this item

    Keywords

    trade credit; relationships; learning; financing costs; risk;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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