Payment Choice in International Trade: Theory and Evidence from Cross-Country Firm Level Data

37 Pages Posted: 21 Aug 2013

See all articles by Andreas Hoefele

Andreas Hoefele

Loughborough University (GEP)

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

Zhihong Yu

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP)

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Date Written: July 31, 2013

Abstract

When trading, firms choose between different payment contracts. As shown theoretically in Schmidt-Eisenlohr (forthcoming), this allows firms in international trade to optimally trade-off differences in financing costs and enforcement across countries. This paper provides evidence from a large number of countries that shows that country characteristics are indeed central determinants of the payment contract choice. As predicted, the use of open account decreases in financing costs and contract enforcement in the source country. We extend the theory and test two additional predictions. First, we show that the more complex the industry of a firm, the more important is the quality of contract enforcement and the less important are the financing costs for the contract choice. Second, we compare direct and indirect exporters and find evidence that suggests that intermediaries play a relevant role in contract enforcement across borders.

Keywords: trade finance, payment contracts, industry complexity, developing countries, trade intermediation

JEL Classification: F120, F300, G210, G320

Suggested Citation

Hoefele, Andreas and Schmidt-Eisenlohr, Tim and Yu, Zhihong, Payment Choice in International Trade: Theory and Evidence from Cross-Country Firm Level Data (July 31, 2013). CESifo Working Paper Series No. 4350, Available at SSRN: https://ssrn.com/abstract=2313479 or http://dx.doi.org/10.2139/ssrn.2313479

Andreas Hoefele

Loughborough University (GEP) ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

Tim Schmidt-Eisenlohr (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Zhihong Yu

University of Nottingham - Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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