Knowledge that Transforms

This paper theoretically and empirically analyzes the financing terms that support international trade. The choice of trade finance terms balances the risk that an importer defaults on an exporter and the possibility that an exporter does not deliver goods as specified. Analysis of transaction-level data from a US exporter reveals that importers located in countries with weak enforcement of contracts typically finance transactions, but these firms are able to overcome the constraints of such environments if they can establish a relationship with the exporter. Furthermore, the manner in which trade is financed shapes the impact of crises.