Abstract

http://ssrn.com/abstract=2111094
 
 

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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

July 9, 2012

Forthcoming, Journal of the European Economic Association.

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 assets. In the short run, the optimal supply contract involves risk sharing, so inducing double marginalization. Credit constraints thus result in higher retail prices, and this is true whether the firm is debt or equity funded. Further, we offer a new theory of supplier finance arms as we show an intrinsic complementarity between supply and lending which reduces financing inefficiencies created by informational asymmetries. The model offers: a theory of countervailing power based on credit constraints; a transmission mechanism linking the cost of borrowing with retail prices; and a motive for outsourcing supply (or distribution) in the face of market risk.

Number of Pages in PDF File: 31

Keywords: risk aversion, vertical contracting, double marginalization, outsourcing, risk sharing, countervailing incentives, finance arms, countervailing power

JEL Classification: L14, L16

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Date posted: July 18, 2012  

Suggested Citation

Nocke, Volker and Thanassoulis, John E., Vertical Relations Under Credit Constraints (July 9, 2012). Forthcoming, Journal of the European Economic Association.. Available at SSRN: http://ssrn.com/abstract=2111094

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 (Contact Author)
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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