Trade Credit and the Stability of Supply Chains

Abstract

We study how production networks adapt when idiosyncratic shocks affect the reliability of a firm in the network. Considering natural disasters, we show that affected firms extend more trade credit, especially if their customers are difficult to replace. The suppliers of affected firms facilitate the trade credit provision by extending more trade credit, especially if the relationship with the affected firm is important. On average, supply chains appear to remain stable. Customers sever their relationships with the affected firms and recur to new suppliers only when the affected firms and their suppliers are financially constrained and cannot extend trade credit.

Keywords: Natural Disasters, production networks, Supply Chains, trade credit

JEL Classification: D2, E23, G3