(Don't) Feed the Mouth that Bites: Trade Credit Spillover through Common Suppliers
74 Pages Posted: 20 May 2024 Last revised: 6 Dec 2024
Date Written: December 06, 2024
Abstract
Product market rivals often source upstream inputs from common suppliers, incentivizing strategic demands for trade credit to prevent the shared suppliers from providing liquidity to rivals – i.e., to avoid “feeding the mouth that bites.” We develop a model to illustrate that when government policies strengthen certain customers’ competitiveness, such strategic incentives become aggravated, leading to a spillover effect of these policies. We test the model predictions using manually collected pair-level trade credit data, and show that customers extract trade credit from common suppliers in an effort to divert these suppliers’ liquidity from rivals already benefiting from government policies.
Keywords: Trade Credit, Policy Spillover, Supply Chains, Common Supplier, QuickPay Reform
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