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In-kind finance: a theory of trade credit

Mike Burkart () and Tore Ellingsen ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes. Among other things, the model explains why trade credit has short maturity, why trade credit is more prevalent in less developed credit markets, and why accounts payable of large unrated firms are more countercyclical than those of small firms.

JEL-codes: G32 (search for similar items in EconPapers)
Date: 2004-06
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Published in American Economic Review, June, 2004, 94(3), pp. 569-590. ISSN: 0002-8282

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