Trade Credit and the Stability of Supply Chains

Abstract

We show that trade credit flows in production networks increase when a firm in the network faces an operating shock. Affected firms extend and receive more trade credit and suppliers provide more trade credit to affected firms if the production network’s break-up costs are larger. When financial constraints over the supply network prevent the increase in trade credit, customers sever their relationships with the affected firms. Our results show that trade credit is used as a glue to enhance the stability of production networks and that firms consider both direct customer relationships and downstream customer-supplier linkages when providing trade credit.

Keywords: Supply chains, Production Networks,Trade Credit, Natural Disasters

JEL Classification: D2, E23, G3