trade credit in a monetary economy abstract this paper examines the importance of financial and technological stochastic trends in the context of a stochastic dynamic general equilibrium monetary economy with multiple means of payment in contrast to earlier empirical work we find support for both a long run substitution condition between money trade credit and interest rates as well as a long run transactions demand for alternative payments media consistent with real business cycle frameworks

investment financing decisions and tax policy mists have analyzed the effects of taxes on capital spending most studies assume that firms respond to prices set in centralized securities markets such as market interest rates of tobin s q and firms undertake all profitable investment projects firms choose the mix or finance among internal funds debt and new equity independently the availability of finance does not limit investment the implications for tax policy are clear the marginal tax rate on returns from a new project matters for investment not the firm s average tax burden on returns from its investments in place for firms that face imperfect markets for

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

product risk asymmetric information and trade credit the purpose of this paper is to explain cross sectional variations in trade credit terms across firms and industries this study shows that there is a separating equilibrium in which the size of the cash discount conveys information about product quality the driving forces of this equilibrium outcome are the risk sharing motives of the producer and buyer as well as asymmetric information about product quality the empirical implications of the model are derived and discussed in relation to industry practices

does trade credit play a signalling role some evidence from smes microdata using micro data on small and medium sized enterprises this paper empirically investigates the signalling hypothesis formulated on the role of trade credit biais and gollier in rev financ stud 10 903 937 1997 burkart and ellingsen in am econ rev 94 569 590 2004 the research method adopted allows evaluation of the impact of suppliers credit on bank debt accounting for the strength duration of bank firm relationships our main finding is that trade credit seems to have an information content for banks especially when the latter do not dispose of adequate soft information on firms which is likely the case at the beginning stages of bank firm relationships an implication of our results is that the availability of suppliers credit might be crucial to foster access to institutional funding for new firms entering the market our evidence also suggests that banks seem to consider suppliers a reliable source of information on firms financial conditions even after several years of lending relationships

a pure financial explanation for trade credit this paper provided a pure financial explanation for the existence of trade credit and for the values of the credit terms offered to customers two motives for extending trade credit were identified the pure operating flexibility motive arises because the opportunity to change credit policy provides the seller an efficient way to respond to fluctuations in demand this motive was eliminated from consideration in this paper by assuming constant demand the seller must hold a liquid reserve when the financial markets are imperfect and the desire to earn an excess rate of return on this reserve explains the pure financial intermediary motive for trade credit the pure financial incentive to lend this liquid reserve to customers was examined by viewing a market borrowing rate of interest that exceeds the market lending rate of interest as a hindrance to trade or equivalently as a financial market tariff this tariff imposes a wedge between the market prices paid and received for the product plus a loan and thereby inflicts a loss of surplus on the seller and buyers trade credit lending enables the seller and or the buyers to recapture at least part of this loss when the source of the tariff does not apply to direct loans to customers financial market tariffs caused by transactions costs fulfill this requirement because the trade credit lender s familiarity with its customers and product provide it with information and collection cost advantages over financial intermediaries tariffs caused by financial intermediary rents fulfill this requirement as well because the parties to a trade credit loan do not employ the services of a financial intermediary increasing opportunity costs and financial market imperfections in addition to the ones described above establish the limits of credit policy the optimal amount of accounts receivable is derived from the condition that the marginal revenue of trade credit lending is equal to the marginal cost this condition combined with factoring costs produces a unique finite optimal credit period accrual accounting for income tax purposes imposes an additional restriction because the firm is taxed on the recovery of its opportunity costs these limitations on credit policy were examined separately in this paper for clarity but they are in effect simultaneously in practice

trade credit the financial crisis and sme access to finance mounting evidence indicates that firms particularly smes suffered from a significant credit crunch during this crisis we analyze for the first time whether trade credit provided an alternative source of external finance to smes during the crisis using firm level spanish data we find that credit constrained smes depend on trade credit but not bank loans and that the intensity of this dependence increased during the financial crisis unconstrained firms in contrast are dependent on bank loans but not on trade credit

supply chains global financial shocks and firm behaviour towards liquidity needs driven by the increasingly important role of supply chains in global production this paper studies empirical association between global credit market shocks and firm behaviour towards liquidity needs across countries and industries focusing on the adjustment of working capital financing we find two pieces of supporting evidence from international firm level panel data covering the period 2002 i 2012 iv first for industries where specific investment in the input supplier customer relationship is large firms are more exposed to credit market shocks we find that measures of global credit market shocks are negatively associated with trade receivables trade payables and inventories conditional on the level of contract intensity in the industries where firms operate second firms in emerging markets are more vulnerable to credit market shocks than are firms in developed countries we are also able to verify the economic significance of sales growth operating cash flows cash stock and firm size in the overall adjustment our findings highlight the importance of balance sheet contagion along supply chains during the 2007 09 global financial crisis

accounts receivable management policy theory and evidence this paper develops and tests hypotheses that explain the choice of accounts receivable management policies the tests focus on both cross sectional explanations of policy choice determinants as well as incentives to establish captives we find size concentration and credit standing of the firm s traded debt and commercial paper are each important in explaining the use of factoring accounts receivable secured debt captive finance subsidiaries and general corporate credit we also offer evidence that captive formation allows more flexible financial contracting however we find no evidence that captive formation expropriates bondholder wealth firms typically sell merchandise on credit rather than requiring immediate cash payment such credit sales generate accounts receivable although credit terms and credit collection procedures have been studied see smith 1980 there has been little systematic analysis of the organizational and financial structures employed to manage the firm s accounts receivable these decisions merit more careful attention for two reasons first receivables are a substantial fraction of corporate assets for example 1986 compustat data indicate that accounts receivable are 21 0 of u s manufacturing corporations total assets second we observe substantial diversity in firms use of specialized contracts and intermediaries in their accounts receivable management policies firms can 1 establish a captive finance subsidiary 2 issue accounts receivable secured debt 3 factor 4 employ a credit reporting firm 5 retain a credit collection agency or 6 purchase a credit insurance policy 1 in this paper we demonstrate that accounts receivable management policy offers opportunities for both the development of a robust theory as well as empirical testing of the theory s implications although the data necessary to

evidence on the determinants of credit terms used in interfirm trade trade credit is created whenever a supplier offers terms that allow the buyer to delay payment in this paper we document the rich variation in interfirm credit terms and credit policies across industries we examine empirically the firm s basic credit policy choices whether to extend credit or to require cash payment and if credit is extended whether to adopt simple net terms or terms with discounts for prompt payment we also examine determinants of variations in two part terms results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness trade credit has important economic significance from both micro and macroeconomic perspectives during the 1990s vendor financing has accounted for an average 1 5 trillion of the book value of all assets of u s corporations and has represented approximately 2 5 times the combined value of all new public debt and primary equity issues during a given year as a component of the money supply trade credit in the form of accounts payable exceeds the primary money supply mi by a factor of 1 5 on average 1 clearly efforts to control economic growth through monetary policy can be confounded by aggregate decisions of businesses to increase or decrease reliance on trade credit financing several recent empirical studies examine determinants of firm reliance on trade credit 2 these studies model supply and demand for trade credit using financial statement data accounts receivable and payable 3 however many aspects of trade credit practice are unexplored most notably little is known about the types of credit terms e g net 30 2 10 net 30 and credit policies that are observed across firms and industries the only comprehensive doc

trade credit and cross country predictable firm returns we investigate the role of trade credit links in generating cross border return predictability between international firms using data from 42 countries from 1993 to 2009 we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable by the returns of their associated customer countries this behavior is especially prevalent for firms with high levels of foreign sales and is robust to a variety of controls to better understand this effect we develop an asset pricing model in which firms in different countries are connected by trade credit links the model has further predictions about this phenomenon including stronger predictability during periods of high credit constraints and high uninformed trading volume we find supportive empirical evidence for these results

the exploitation of relationships in financial distress the case of trade credit this paper develops optimal pricing lending and renegotiation strategies for companies in relationships where one firm is highly dependent on the other long term trade creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors anticipating these larger renegotiation concessions not only do less financially stable firms prefer trade credit but all firms agree to pay a higher interest rate for trade credit the model also explains the existence of teaser interest rates and convenience classes findings are consistent with those of the relationship lending literature

flight to quality in banking and economic activity abstract recent explanations of the transmission mechanism of monetary policy have emphasized that riskier lower net worth borrowers are more dependent on bank lending than larger less risky borrowers evidence from the federal reserve s survey on terms of bank lending indicates that the proportion of relatively high quality new loans safe moves countercyclically and granger causes gdp and inventory investment in the aftermath of a tightening of monetary policy the safe variable increases and in turn policy tends to relax once safe has risen

stages of diversification in africa abstract this paper investigates the relationship between manufacturing diversification and level of economic development for 29 african countries three diversification stages are identified considerable differences in diversification are found over the first stage at the low end of the per capita income scale diversification alone will not encourage development in poorer countries until obstacles such as weak institutions poor governance and a lack of infrastructure are addressed diversification slows down over the remaining stages as countries develop results show countries further along the african economic development path successfully diversified manufacturing

uncertainty aversion and rationality in games of perfect information abstract this paper shows how uncertainty aversion can resolve ties in extensive games of perfect information and thereby refine subgame perfection in such games this is done by assuming that a players are rational with multi prior expected utility functions of gilboa and schmeidler 1989 journal of economic theory 48 221 237 and b a player s plan of the game corresponds to set valued acts at each of his decision nodes the so called strategy system in contrast to single valued act as specified in the traditional notion of strategy profile the effects of pre communication channels among players are studied and are reflected in each of the three proposed solutions finally existence of equilibria are established for each proposed solution concept as well as comparisons with other existing solutions

trade credit and informational asymmetry commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held by offering trade credit a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short term financing the information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments traditional explanations for the widespread use of trade credit fall into two categories the financing motive holds that capital market imperfections enable sellers to finance buyer purchases at lower cost than financial institutions ferris 4 argues that trade credit provides payment flexibility and thus reduces the overall need for buyers and sellers to maintain precautionary balances emery 3 contends that noncompetitive rents of financial institutions can be circumvented by sellers and buyers through provision of trade credit however the financing motive is not sufficient to explain why small suppliers offer trade credit the wide cross sectional variation in terms or why large buyers often take the prompt payment discount late a second set of explanations is best described as pricing motivations for trade credit provision nadiri 10 argues that availability of alternative payment terms can increase product demand but does not indicate why the offered terms could not be duplicated by financial institutions schwartz and whitcomb 14 argue that trade credit is used to circumvent robinson patman and similar prohibitions on price discrimination the correctness of this position depends on the charge to users of trade credit exceeding the cost of provision by the seller although the explanation is possible in principle an empirical question remains as to why variations in actual credit terms appear to be based on product market rather than buyer characteristics the literature also contains analyses of the impact of changing macroeconomic conditions on trade credit terms and aggregate credit flows schwartz 13 for example employs a financing motive for trade credit to conclude that restrictive monetary policy can be partly mitigated by liberalization of trade credit terms by firms with relatively easy access to capital markets however a microeconomic

we will be right with you managing customer expectations with vague promises and cheap talk delay announcements informing customers about anticipated service delays are prevalent in service oriented systems how delay announcements can influence customers in service systems is a complex problem that depends on both the dynamics of the underlying queueing system and on the customers strategic behavior we examine this problem of information communication by considering a model in which both the firm and the customers act strategically the firm in choosing its delay announcement while anticipating customer response and the customers in interpreting these announcements and in making the decision about when to join the system and when to balk we characterize the equilibrium language that emerges between the service provider and her customers the analysis of the emerging equilibria provides new and interesting insights into customer firm information sharing we show that even though the information provided to customers is nonverifiable it improves the profits of the firm and the expected utility of the customers the robustness of the results is illustrated via various extensions of the model in particular studying models with incomplete information on the system parameters allows us also to highlight the role of information provision in managing customer expectations regarding the congestion in the system further the information could be as simple as high congestion low congestion announcements or it could be as detailed as the true state of the system we also show that firms may choose to shade some of the truth by using intentional vagueness to lure customers

opening up international trade with eastern europe trade with eastern europe carl b hamilton and l alan winters previous economic policy in the soviet union and eastern europe sought to restrict international trade with market economies hence liberalization and reform should now lead to a huge increase in such trade this will have a major impact both on the reforming economies and on their new trade partners first we develop an empirical model of trade flows between existing market economies and use this to forecast long run trade flows as the former soviet union and eastern europe are reabsorbed into the world economy second we provide a more detailed analysis of one key sector agricultural trade we compare and contrast three regime changes reform in the east admission of the east to the ec cap and worldwide success on agricultural liberalization in the gatt third we adduce evidence of high quality human capital in eastern europe and argue that this will tend to confer a comparative advantage in quite sophisticated products we conclude by stressing that since trade cannot be permanently and profoundly unbalanced western market economies can enjoy potential gains from trade only if they allow market access to emergent producers from the former soviet union and eastern europe

bank credit and trade credit evidence from natural experiments abstract prior studies find mixed evidence about the substitution relation between bank credit and trade credit in this paper using two bank interest rate deregulations in china we revisit the substitution hypothesis by examining how exogenous increases in the availability of bank credit affect trade credit we find that firms with higher credit risk increased their use of bank credit and reduced their use of trade credit after the 2004 bank interest rate ceiling deregulation whereas firms with lower credit risk increased their use of bank credit and reduced their use of trade credit after the 2013 bank interest rate floor deregulation our results provide supportive evidence for the substitution hypothesis that firms reduce their use of trade credit after the relaxation of bank credit and suggest that bank credit is more favorable short term financing than trade credit

trade credit and the effect of macro financial shocks evidence from u s panel data using disaggregated panel data we examine how firms change trade credit in response to a monetary tightening we find that both accounts payable and accounts receivable increase with tighter monetary policy implying that trade credit helps firms absorb the effect of a credit contraction further both s p 500 firms and a comparison group of smaller firms increase net trade credit accounts receivable minus payable making up for the reduced liquidity associated with tighter policy however we find no evidence that large firms play this role more actively than smaller firms

trade credit and credit rationing asymmetric information between banks and firms can preclude financing of valuable projects trade credit alleviates this problem by incorporating in the lending relation the private information held by suppliers about their customers incentive compatibility conditions prevent collusion between two of the agents e g the buyer and the seller against the third e g the bank consistent with the empirical findings of petersen and rajan 1995 firms without relationships with banks resort more to trade credit and sellers with greater ability to generate cash lows provide more trade credit finally small firms react to monetary contractions by using trade credit consistent with the empirical results of nilsen 1994 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

trade credit and the bank lending channel the bank lending channel theory posits that during monetary contractions banks restrict some firms loans thus reducing their desired investment independently of interest rates previous research finds small firms reduce while large firms accelerate loan growth we find that small firms increase trade credit a substitute credit indicating a strong loan demand it supports the bank lending channel they do not voluntarily cut bank loans since they increase a less desirable alternative using trade credit is propitious since unlike commercial paper investigated by previous researchers it is widely used by the small firms suffering the loan decline surprisingly we also find large firms increase trade credit a puzzle since they are typically assumed to have wide access to other credit using individual manufacturing firm data we find the reasons large firms use trade credit are financial in nature those without a bond rating increase trade credit that is without access to open market credit as relatively few firms have this mark of quality it implies that more firms are affected by credit constraints than previously believed

cheap talk games may have unique informative equilibrium outcomes abstract we demonstrate that cheap talk games can have unique informative equilibrium outcomes by providing an example of an infinite action bayesian game which absent cheap talk does not possess an equilibrium

stages of diversification this paper studies the evolution of sectoral concentration in relation to the level of per capita income we show that various measures of sectoral concentration follow a u shaped pattern across a wide variety of data sources countries first diversify in the sense that economic activity is spread more equally across sectors but there exists relatively late in the development process a point at which they start specializing again we discuss this finding in light of existing theories of trade and growth which generally predict a monotonic relationship between income and diversification

economic development as self discovery in the presence of uncertainty about what a country can be good at producing there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated we develop a general equilibrium framework for a small open economy to clarify the analytical and normative issues we highlight two failures of the laissez faire outcome there is too little investment and entrepreneurship ex ante and too much production diversification ex post optimal policy consists of counteracting these distortions to encourage investments in the modern sector ex ante but to rationalize production ex post we provide some informal evidence on the building blocks of our model

coordination failures and government policy a model with applications to east asia and eastern europe abstract poor countries must specialize in standardized labor intensive commodities middle income countries may have a richer menu of options if their labor force is reasonably well educated and skilled the multiplicity of equilibria is due to a coordination problem inherent in activities that require specialized inputs if no intermediate inputs are presently produced there may be little incentive for any single firm to do so on its own the economy may get stuck in a low wage low tech equilibrium an investment subsidy or a minimum wage policy can enhance welfare by moving the economy to a superior equilibrium

a transactions theory of trade credit use this paper derives a transactions theory of trade credit use from the motives of trading partners to economize on the joint costs of exchange in the formal analysis uncertain delivery time is used to generate a demand by firms to hold inventories of both goods and money trade credit is viewed as a mechanism that separates the exchange of money from the uncertainty present in the exchange of goods by forewarning both trading partners of the timing of money flows credit permits a reduction in precautionary money holdings and the more effective management of net money accumulations

local financial development and the trade credit policy of italian smes we investigate the relation between local financial development and trade credit in an integrated financial market our results suggest that trade credit complements the formal finance of small and medium sized enterprises smes at the local level provincial banking development in italy increases the provision of trade credit by smes and stimulates the redistribution of loans via trade credit however cooperative banking reduces the use of trade credit at the local level evidence shows that lower levels of provincial banking development are linked with a stronger decline in trade credit at the start of the global financial crisis we also find that smes in provinces with industrial districts use more trade credit our results confirm that local differences in banking development and the trade credit policy of smes within countries matter adding to earlier findings that the provision of trade credit is complementary to the development of financial institutions at the country level

cheap talk can matter in bargaining this paper describes an intuitive way in which cheap talk can matter in a twostage bargaining game in which talk may be followed by serious negotiation the intuition that all buyers would claim to have low reservation prices is incorrect in our model instead if good faith participation is endogenously determined then the parties can use talk to trade off bargaining position against the probability of continued negotiation our cheap talk equilibrium features bargaining behavior that could not be equilibrium behavior in the absence of talk

an optimal financial response to variable demand this paper develops a positive theory of trade credit based on its use as a financial response to deterministic variations in demand the operating alternatives to trade credit which include the use of storage or additional capacity are modeled using results from the peak load pricing literature the paper shows that the extension of credit partitions the buyer s inventory cost and permits specialization at incurring the components of this cost this specialization is economical when the seller has an advantage at incurring the financial cost and does not have an advantage at incurring the operating cost of accommodating variable demand conditions that provide these necessary and sufficient cost relationships are described the paper also shows that a reduction in costs rather than an increase in revenues is the source of both the buyer s and seller s increase in wealth

the source of fluctuations in money evidence from trade credit abstract this paper tests the relative importance of technology shocks and financial shocks as sources of fluctuations in money the model extends the theory of king and plosser 1984 by recognizing that both money and trade credit provide transactions services under certain conditions the co movements between money and trade credit can reveal the nature of the underlying shocks the empirical results strongly suggest that shocks to the financial system account for most of the fluctuations in money in the long run and at business cycle frequencies on the other hand technology shocks appear to be more important at seasonal frequencies

communication between rational agents abstract conventional game theoretic solution concepts never guarantee meaningful communication in cheap talk games i define a solution concept which does guarantee communication in some games i assume full rationality without imposing equilibrium conditions but add a natural behavioral assumption about how agents use language agents have a propensity to speak the truth and to believe others speak the truth but use the game s strategic incentives to check whether such behavior and beliefs are rational i also define and prove the existence of an equilibrium version of the concept and present examples where its predictions seem more natural than farrell s neologism proof equilibrium

learning in equilibrium models of arbitration this paper analyzes strategic communication in equilibrium models of conventional and final offer interest arbitration both models emphasize the role of learning by the arbitrator from the parties offers about the state of the employment relationship which is known to the parties but not to the arbitrator in both models the arbitrators equilibrium behavior is identical to the reduced form decision rule typically assumed in the empirical literature the paper thereby provides a structural interpretation for the existing empirical work the paper also represents progress towards a complete theory of arbitration because it satisfies three conditions that will be required of any such theory first the models predictions match the existing empirical evidence second the models describe equilibrium behavior and third the models are built on a common set of assumptions about preferences information and commitment the paper therefore not only provides an equilibrium foundation for the intuition that the arbitrator might learn from the parties offers but also uses the idea of learning to develop a unified analytical treatment of the two major forms of interest arbitration this abstract was borrowed from another version of this item