Trade credit use and competition in the value chain
Trade credit is a major source of finance in value chains in developed and emerging economies
Abstract
Trade credit is a major source of finance in value chains in developed and emerging economies. Despite its ubiquitous use, this is one of the first empirical studies that analyzes why the use of trade credit varies along the value chain. We argue that competition faced by firms at different stages in the value chain and enforcement mechanisms that stimulate repayment jointly determine the use of trade credit. We distinguish two dimensions of competition, that is, rivalry and customer bargaining power. Competition may stimulate firms to provide trade credit to keep customers from switching to other suppliers. Yet, high contract enforcement costs relative to the value of the transactions, reduce the willingness to offer trade credit.
This is an output from the ‘Delivering Inclusive Financial Development and Growth’ project
Citation
Hermes, N. , Lensink, R. , Lutz, C. and Thu, U. N. (2016), Trade credit use and competition in the value chain. Economics of Transition 24: 765-795.