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Vertical Relations Under Credit Constraints

37 Pages Posted: 20 Jan 2010  

Volker Nocke

University of Mannheim

John E. Thanassoulis

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2010

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.

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

Suggested Citation

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

Volker Nocke

University of Mannheim ( email )

John E. Thanassoulis

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://https://sites.google.com/site/thanassoulis/

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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