Interest Rates in Trade Credit Markets

Humberto Moreira (), Walter Novaes and Klenio Barbosa

No 127, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: There is evidence that suppliers have private information about their customers' credit risk. Yet, interest rates in trade credit markets are usually industry-not-firm specific. Why? If the demand for intermediate products is inelastic, suppliers should raise interest rates until they reach their customers' outside option, which, by definition, cannot reflect information that is privy to suppliers. In contrast, a highly elastic demand induces suppliers with monopoly power to waive interest, making private information once more irrelevant to the trade-credit rate. By characterizing these two equilibria, we obtain implications on when trade-credit rates shouldn't vary with private information held by suppliers.

Keywords: Trade Credit; Invariance of Interest Rates (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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