Towards a Theory of Trade Finance
43 Pages Posted: 27 Apr 2011
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Towards a Theory of Trade Finance
Date Written: April 27, 2011
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 considering one shot transactions, repeated transactions and 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
Keywords: trade finance, payment contracts, trade patterns, distance interaction
JEL Classification: F120, F300, G210, G320
Suggested Citation: Suggested Citation
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