Towards a Theory of Trade Finance

Tim Schmidt-Eisenlohr

No 583, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Shipping goods internationally is risky and takes time. To allocate risk and to finance the time gap between production and sale, a range of payment contracts is utilized. I study the optimal choice between these payment contracts and their implications for trade. The equilibrium contract is determined by financial market characteristics and contracting environments in both the source and the destination country. Trade increases in enforcement probabilities and decreases in financing costs proportional to the time needed for trade. Empirical results from gravity regressions are in line with the model, highly significant and economically relevant. They suggest that importer finance is as important for trade as exporter finance.

Keywords: Trade finance; Payment contracts; Trade patterns; Distance interaction (search for similar items in EconPapers)
JEL-codes: F12 F3 G21 G32 (search for similar items in EconPapers)
Date: 2011-12-01
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Towards a theory of trade finance (2013)
Working Paper: Towards a Theory of Trade Finance (2011)
Working Paper: Towards a Theory of Trade Finance (2010)
Working Paper: Towards a Theory of Trade Finance (2009)
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