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Ex ante bargaining and ex post enforcement in trade credit supply: theory and evidence from China

Author

Listed:
  • Watanabe, Mariko
  • Yanagawa, Noriyuki
Abstract
If payment of goods is easily default, economic transaction may deeply suffer from the risk. This risky environment formed a mechanism that governs how economic transaction is realized, subsequently how trade credit is given. This paper distinguished ex ante bargaining and ex post enforcement, then modeled that bargaining power reduces trade credit ex ante, and ex post enforcement power and cash in hand of buyer can enhances both trade amount and trade credit in a presence of default risk. We modeled this relationship in order to organize findings from previous literature and from our original micro data on detailed transaction in China to consistently understand the mechanism governing trade credit. Then empirically tested a structure from the theoretical prediction with data. Results show that ex post enforcement power of seller mainly determines size of trade credit and trade amount, cash in hand of buyer can substitute with enforcement power; Bargaining power of seller is exercised to reduces trade credit and trade amount for avoiding default risk, but it simultaneously improves enforcement power as well. We found that ex post enforcement power consists of (ex ante) bargaining power on between two parties and intervention from the third party. However, its magnitude is far smaller than the direct impact to reduce trade credit and trade amount.

Suggested Citation

  • Watanabe, Mariko & Yanagawa, Noriyuki, 2011. "Ex ante bargaining and ex post enforcement in trade credit supply: theory and evidence from China," IDE Discussion Papers 279, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    • Handle: RePEc:jet:dpaper:dpaper279
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    References listed on IDEAS

    as
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    Cited by:

    1. Mariko Watanabe, 2014. "An analytical framework for the vigorous entry and low price phenomenon," Chapters, in: Mariko Watanabe (ed.), The Disintegration of Production, chapter 1, pages 26-48, Edward Elgar Publishing.

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    More about this item

    Keywords

    China; Corporate accounting; Industrial management; Trade credit; Enforcement power; Bargaining power; Cash constraint; Competition in product market;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G2 - Financial Economics - - Financial Institutions and Services
    • K0 - Law and Economics - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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