In-Kind Finance

Financial Markets Group, London School of Economics, Discussion Paper No. 421

32 Pages Posted: 25 Oct 2002

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Finance Theory Group (FTG); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 6, 2002

Abstract

It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes depending on, amongst other things, the borrower's wealth. The model also explains why firms both take and give costly trade credit even when the borrowing rate exceeds the lending rate. Finally, the model suggests reasons for why trade credit is more prevalent in less developed credit markets and for why accounts payable of large unrated firms are more countercyclical than those of small firms.

Keywords: credit rationing, trade credit, input monitoring

JEL Classification: G32

Suggested Citation

Burkart, Mike C. and Ellingsen, Tore, In-Kind Finance (August 6, 2002). Financial Markets Group, London School of Economics, Discussion Paper No. 421, Available at SSRN: https://ssrn.com/abstract=322440 or http://dx.doi.org/10.2139/ssrn.322440

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

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111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

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Finance Theory Group (FTG) ( email )

United States

Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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HOME PAGE: http://www.ecgi.org

Tore Ellingsen

Stockholm School of Economics - Department of Economics ( email )

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S-113 83 Stockholm
Sweden
+46 8 736 9260 (Phone)
+46 8 31 3207 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

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N-5035 Bergen
Norway

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