Trade Credit, Markups, and Relationships

73 Pages Posted: 27 Oct 2020

See all articles by Alvaro Garcia-Marin

Alvaro Garcia-Marin

Universidad de los Andes, Chile

Santiago Justel

University of California, Los Angeles (UCLA)

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

Date Written: 2019

Abstract

Trade credit is the most important form of short-term finance for firms. In 2019, U.S. nonfinancial firms had about $4.5 trillion in trade credit outstanding equaling 21 percent of U.S. GDP. This paper documents two striking facts about trade credit use. First, firms with higher markups supply more trade credit. Second, trade credit use increases in relationship length, as firms often switch from cash in advance to trade credit but rarely away from trade credit. These two facts can be rationalized in a model where firms learn about their trading partners, sellers charge markups over production costs, and financial intermediation is costly. The model also shows that saving on financial intermediation costs provides a strong rationale for the dominance of trade credit. Using Chilean data at the firm-product-level and the trade-transaction level, we find support for all predictions of the model.

Keywords: trade credit, markups, financial intermediation, learning

JEL Classification: F120, F140, G210, G320

Suggested Citation

Garcia-Marin, Alvaro and Justel, Santiago and Schmidt-Eisenlohr, Tim, Trade Credit, Markups, and Relationships (2019). CESifo Working Paper No. 7600, Available at SSRN: https://ssrn.com/abstract=3377697 or http://dx.doi.org/10.2139/ssrn.3377697

Alvaro Garcia-Marin (Contact Author)

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

Santiago Justel

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System ( email )

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

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