Towards a Theory of Trade Finance

43 Pages Posted: 27 Apr 2011

See all articles by Tim Schmidt-Eisenlohr

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

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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

Schmidt-Eisenlohr, Tim, Towards a Theory of Trade Finance (April 27, 2011). CESifo Working Paper Series No. 3414, Available at SSRN: https://ssrn.com/abstract=1824173 or http://dx.doi.org/10.2139/ssrn.1824173

Tim Schmidt-Eisenlohr (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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