Optimal payment contracts in trade relationships

Christian Fischer

MPRA Paper from University Library of Munich, Germany

Abstract: We study a seller's trade credit provision decision in a situation of repeated contracting with incomplete information over the buyer's payment propensity when the enforceability of formal contracts is uncertain. The payment terms of a transaction are selected in an inter-temporal trade-off between improving the quality of information acquisition and mitigating relationship breakdown risks. When contract enforcement institutions are weak, the optimal within-relationship provision dynamics of trade credit can be uniquely determined. We obtain empirical evidence showing that in developing countries the relevance of trade credit in buyers' payment schedules has risen over-proportionally in recent years.

Keywords: Payment contracts; Trade credit; Trade dynamics; Relational contracts; Weak institutions (search for similar items in EconPapers)
JEL-codes: D83 F34 L14 O16 (search for similar items in EconPapers)
Date: 2020-06-04
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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Related works:
Working Paper: Optimal payment contracts in trade relationships (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:100891

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