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Ensuring Sales: A Theory of Inter-firm Credit

Arup Daripa () and Jeffrey Nilsen ()

American Economic Journal: Microeconomics, 2011, vol. 3, issue 1, 245-79

Abstract: We propose a simple theory to account for the prevalence of interfirm credit at an interest rate of zero. A downstream firm trades off inventory holding costs against lost sales. Lost final sales impose a negative externality on the upstream firm. The solution requires a subsidy limited by the value of inputs. Allowing the downstream firm to pay with a delay is precisely such a solution. A reverse externality accounts for the use of prepayment. We clarify how input prices vary with such policies, and when trade credit/prepayment is more efficient than pure input price adjustments. (JEL D21, D62, D92, G31, L25)

JEL-codes: D21 D62 D92 G31 L25 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mic.3.1.245
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Handle: RePEc:aea:aejmic:v:3:y:2011:i:1:p:245-79