Research
Research
Abstract:
In Mexico, 75% of trade credit contracts carry a 0% interest rate, even as bank loans average 13%. In this paper I ask why suppliers choose to offer zero-interest trade credit. I develop a model in which a monopolistic intermediate input supplier jointly chooses the input price and the trade credit interest rate. The key insight is that suppliers, unlike banks earn revenue through two channels: the interest rate and the input price. Charging interest reduces customer's input demand more than raising input prices does, so the supplier optimally sets the trade credit rate to zero and recovers financing costs through a higher input price. I calibrate the model to Mexico and run counterfactuals: moving to US-style bank credit conditions raises output by approximately 12%, driven by capital accumulation among previously constrained firms. Firm level empirical evidence from Mexico confirms the mechanism: zero-interest trade credit users purchase significantly more intermediate inputs than bank credit users.
With Hyunju Lee and Radek Palauzynski
Abstract
With Van Pham and Terry Tsai
With Van Pham and Karleigh Schilling