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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/mic.3.1.245 (application/pdf)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmic:v:3:y:2011:i:1:p:245-79

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Journal: Microeconomics is currently edited by Johannes Hörner

More articles in American Economic Journal: Microeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().