Ensuring Sales: A Theory of Inter-Firm Credit

We propose a simple theory to account for the prevalence of inter-firm 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 valu...

Full description

Saved in:
Bibliographic Details
Published in:American economic journal. Microeconomics 2011-02, Vol.3 (1), p.245-279
Main Authors: Daripa, Arup, Nilsen, Jeffrey
Format: Article
Language:English
Subjects:
Bank loans
Customers
Default
Deferred expenses
Discounts
Economic theory
Externality
Input prices
Interest costs
Interest rates
Inventory
Microeconomics
Optimal policy
Prepayments
Price cuts
Sales
Studies
Subsidies
Suppliers
Trade credit
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We propose a simple theory to account for the prevalence of inter-firm 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.
ISSN:1945-7669
1945-7685
DOI:10.1257/mic.3.1.245