"Aggregate Fluctuations and the Role of Trade Credit

Lin Shao

Review of Economic Dynamics, 2025, vol. 56

Abstract: This paper studies the aggregate implications of trade credit in a dynamic, general equilibrium model where heterogeneous entrepreneurs choose their lending and borrowing of trade credit in the presence of financial frictions. Motivated by empirical evidence, the model shows how trade credit flows from less constrained firms to more constrained ones, both in the cross-sectional distribution and in firms' response to heterogeneous financial shocks. In the face of an aggregate financial shock, entrepreneurs reduce their trade credit lending, further tightening their customers' borrowing constraints, resulting in an amplification of the initial shock. In contrast, when the financial shock only affects some, but not all, entrepreneurs, trade credit facilitates the flow of financing to entrepreneurs in financial distress, thereby mitigating its negative impacts. This mechanism, however, is only effective when the shock affects a sufficiently small number of entrepreneurs. (Copyright: Elsevier)

Keywords: Trade credit; firm heterogeneity; financial crisis; financial frictions (search for similar items in EconPapers)
JEL-codes: E23 E44 G32 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Aggregate Fluctuations and the Role of Trade Credit (2017)
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DOI: 10.1016/j.red.2024.101258

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