Trade Credits under Imperfect Enforcement: A Theory with a Test on Chinese Experience

Yanagawa Noriyuki, Ito Seiro and Mariko Watanabe

No 58, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: It is widely recognized that trade credit is an important financial mechanism, particularly in developing economies and transition economies where institutions are weak. This paper documents theoretical analysis and empirical accounts on what facilitates an effective supply of trade credit based on original surveys conducted in P.R. of China. Our theory predicts that trade volume and trade credit are increasing function of cash held by the buyer and enforcement technology of the seller. Furthermore, if the state sector’s enforcement technology is high, it has positive external effect to expand the volumes of trade credit and trades in the whole economy. From the data, we found that government made active commitment in enforcement of trade credit contract and the government owned firms are main supplier and receivers of trade credit, which suggest that enforcement by government and state sector were effective against presumptions in the previous literatures.

Keywords: Law and finance; Economic growth; Incomplete contract; Enforcement; Trade policy; Credit; China; 経済成長; 貿易政策; 信用; 中国 (search for similar items in EconPapers)
JEL-codes: G2 K0 O5 P31 Q5 (search for similar items in EconPapers)
Date: 2006-06-01
New Economics Papers: this item is included in nep-cfn, nep-cna, nep-dev, nep-int, nep-law, nep-sea and nep-tra
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 58. 2006-06-01

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