Abstract

http://ssrn.com/abstract=1539308
 
 

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Vertical Relations Under Credit Constraints


Volker Nocke


Department of Economics, University of Mannheim

John E. Thanassoulis


University of Warwick - Warwick Business School; Oxford-Man Institute, University of Oxford; Nuffield College, University of Oxford

January 2010

CEPR Discussion Paper No. DP7636

Abstract:     
We model the impact credit constraints and market risk have on the vertical relationships between firms in the supply chain. Firms which might face credit constraints in future investments become endogenously risk averse when accumulating pledgable income. In the short run, the optimal supply contract therefore involves risk sharing, thereby inducing double marginalization. Credit constraints thus result in higher retail prices. The model offers a concise explanation for several empirical regularities of firm behavior. We demonstrate an intrinsic complementarity between supply and lending providing a theory of finance arms of major suppliers; a monetary transmission mechanism linking the cost of borrowing with short-run retail prices that can help explain the price puzzle in macroeconomics; a theory of countervailing power based on credit constraints; and a motive for outsourcing supply (or distribution) in the face of market risk.

Number of Pages in PDF File: 37

Keywords: countervailing power, double marginalization, finance arms, financial companies, market risk, monetary transmission mechanism, outsourcing, price puzzle, risk aversion, risk sharing, vertical contracting

JEL Classification: G32, L14, L16

working papers series


Date posted: January 20, 2010  

Suggested Citation

Nocke, Volker and Thanassoulis, John E., Vertical Relations Under Credit Constraints (January 2010). CEPR Discussion Paper No. DP7636. Available at SSRN: http://ssrn.com/abstract=1539308

Contact Information

Volker Nocke
Department of Economics, University of Mannheim ( email )
D-68131 Mannheim
Germany
HOME PAGE: http://nocke.vwl.uni-mannheim.de
John E. Thanassoulis
University of Warwick - Warwick Business School ( email )
Coventry CV4 7AL
United Kingdom
Oxford-Man Institute, University of Oxford ( email )
Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom
Nuffield College, University of Oxford ( email )
New Road
Oxford, OX1 1NF
United Kingdom
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