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, and what this entails for output. 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. Due to financial constraints, charging interest reduces customers’ 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 find that trade credit is especially valuable in emerging markets: without trade credit output drops 12% when financial frictions are high, but only half as much under lower fictions. 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