Optimal payment contracts in trade relationships

Christian Fischer

No 332, DICE Discussion Papers from Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

Abstract: Trade credit is one of the most important sources of short-term finance in buyer-seller transactions.This paper studies a seller's trade credit provision decision in a situation of repeated contracting withincomplete information over the buyer's ability and willingness of payment compliance when theenforceability of formal contracts is uncertain. We show that selecting the payment terms of a trans-action corresponds to managing an inter-temporal trade-off between improving the quality of infor-mation acquisition and mitigating relationship breakdown risks. The dynamically optimal sequenceof payment contracts can be uniquely determined provided that the quality of contract enforcementinstitutions is sufficiently low.

Keywords: Payment contracts; Trade credit; Trade dynamics; Relational contracts; Contract enforcement (search for similar items in EconPapers)
JEL-codes: D83 F34 G32 L14 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cta and nep-mic
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Working Paper: Optimal payment contracts in trade relationships (2020)
Working Paper: Optimal payment contracts in trade relationships (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dicedp:332

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