Trade Credit Model: A Time Elasticity Approach

39 Pages Posted: 27 Jul 2020

See all articles by Adalto Goncalves

Adalto Goncalves

Insper Instituto de Ensino e Pesquisa

Date Written: March 31, 2020

Abstract

We develop a theoretical model to explain the impact of market power in the product market and financial constraints on trade credit extension. Our model is based on a rational profit maximizing firm operating with a certain level of market power represented by the price elasticity of its product and with customers presenting a certain degree of financial constraint which reflects in their trade credit term-sensitivity of demand. Besides showing the detailed deduction of this model using a non-linear programming approach (Kuhn-Tucker) we show the trade-offs that firms face to increase their profit by selling on credit and compare its implications to the trade credit literature. We further confirm our findings empirically using Compustat quarterly data for 8,602 US firms drawn from 2004 to 2010.

Keywords: trade credit, market power, monopoly rents, liquidity provision

JEL Classification: G30; G32; D01; D21

Suggested Citation

Goncalves, Adalto, Trade Credit Model: A Time Elasticity Approach (March 31, 2020). Available at SSRN: https://ssrn.com/abstract=3523454 or http://dx.doi.org/10.2139/ssrn.3523454

Adalto Goncalves (Contact Author)

Insper Instituto de Ensino e Pesquisa ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
171
PlumX Metrics