Firms depend heavily on trade credit. This paper introduces a trade credit network into a structural model of the economy. In an empirical analysis of the model, we find that trade credit is an elusive insurance: as long as a firm is financially unconstrained and times are good, more trade credit enhances sales stability and insures against shocks to the firm’s suppliers. However, if a firm becomes financially constrained or times are bad, trade credit fails to insure against supplier shocks. Moreover, if the firm is low on cash, trade credit propagates shocks from a supplier to its customer.
|Series||GSBE Research Memoranda|
- e32 - "Business Fluctuations; Cycles"
- g32 - "Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill"
- l14 - "Transactional Relationships; Contracts and Reputation; Networks"
- trade credit
- credit chains
- spillover effects