American Economic Review Vol. 94 No. 3 2004

In-Kind Finance: A Theory of Trade Credit

Mike Burkart¹; Tore Ellingsen²

¹ Department of Finance and SITE, Stockholm School of Economics, Sveavägen 65, Box 6501, SE-113 83 Stockholm, Sweden. · ² Department of Economics, Stockholm School of Economics, Sveavägen 65, Box 6501, SE-113 83 Stockholm, Sweden.

Abstract

It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes. Among other things, the model explains why trade credit has short maturity, why trade credit is more prevalent in less developed credit markets, and why accounts payable of large unrated firms are more countercyclical than those of small firms.

DOI

10.1257/0002828041464579

Volume

94

Issue

3

Pages

569-590

Language

en

Sources

crossref openalex

Cite

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