Inter-firm credit and industrial links
This thesis addresses two fundamental puzzles about trade credit: why does it appear to be so expensive. and why do input suppliers engage in the business of lending money. Both questions are answered analysing the interaction between the financial and the industrial aspects of the supplier-customer relationship. In the first part of the thesis we present a model where, in a context of limited enforceability of contracts, suppliers have a comparative advantage over banks in lending to their customers because they hold the extra threat of stopping the sup-ply of intermediate goods. Suppliers also act as lenders of last resort, providing insurance against liquidity shocks that may endanger the survival of their cus-tomers. The relatively high implicit interest rates of trade credit result from the existence of default and insurance premiums. The two necessary elements for these two roles of suppliers are the existence of some relationship surplus that is split between suppliers and customers, and an environment where debt repayment is difficult to enforce. Then we extend the analysis to suppliers who are themselves financially con-strained. Under certain assumptions, the optimal financial contract that arises is similar to a standard factoring contract. The interest rates paid by suppliers and customers in this contract depend on their own creditworthiness, but also on the characteristics of their commercial relationship. Finally the implications of the basic model are examined empirically using both parametric and non-parametric techniques on a panel of UK firms. The results show some regularities that had not been identified in previous literature and that support the role of suppliers as debt collectors and insurance providers of the basic model. In particular these results are consistent with the idea of trade credit being related to the existence of either some degree of technological specificity or a relationship surplus that takes time to build. Evidence is also found of the support of suppliers to their customers experiencing some form of liquidity shock.