Authors
Daniela Fabbri, Anna Maria C Menichini
Publication date
2016/6/1
Journal
Journal of Financial Economics
Volume
120
Issue
3
Pages
561-584
Publisher
North-Holland
Description
The paper presents a new theory of trade credit in which firms buy inputs on credit from suppliers to restore the benefits of secured bank financing impaired by contract incompleteness. In a setting where investment is endogenous and unobservable to financiers, we show that a bank-secured credit contract is time-inconsistent. Upon being granted credit, the entrepreneur has an incentive to alter the original input combination, jeopardizing the bank’s revenues. Anticipating the entrepreneur’s opportunism, the bank offers an unsecured credit contract, reducing the surplus from the venture. One way for the entrepreneur to commit to the contract terms is to purchase inputs on credit from the supplier. The supplier observes the input investment and acts as a guarantor that inputs will be purchased as contracted, thus facilitating access to secured bank financing. The commitment role of trade credit still holds in a multi …
Total citations
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Scholar articles
D Fabbri, AMC Menichini - Journal of Financial Economics, 2016