Download This PaperFormation of Supply Chains and Trade Credit: Can Banks Amplify Contagion Risk?
46 Pages Posted: 26 Sep 2018 Last revised: 24 Jun 2022
Date Written: ,
Abstract
I develop a simple contract-theoretic model of multi-stage economies to address the nexus between trade credit, bank credit and balance-sheet contagion. First, I show that competitive markets in which heterogeneous price-taker firms compete strategically by setting trade credit settlements have a unique symmetric equilibrium which dictates the production flow along the chains. Second, I reconcile the conflicting evidence on the role of credit chains either as shock absorber or shock amplifier with a testable condition. I use the condition to argue that typical rationing used by banks (i.e. richer firms obtaining more credit) may worsen the chains' resilience to exogenous shocks (such as the first-order effects of COVID-19) unless sufficiently aggressive to rarefy the trade-credit network.
Keywords: Input-Output, Balance-Sheet, Contagion, Networks, Inter-Firm, Trade-Credit, COVID-19
JEL Classification: E20, G32, D85,L14
Suggested Citation: Suggested Citation