Optimal payment contracts in trade relationships

Fischer, Christian (2020): Optimal payment contracts in trade relationships.

Abstract

We study a seller's trade credit provision decision in a situation of repeated contracting with incomplete information over the buyer's payment propensity when the enforceability of formal contracts is uncertain. The payment terms of a transaction are selected in an inter-temporal trade-off between improving the quality of information acquisition and mitigating relationship breakdown risks. When contract enforcement institutions are weak, the optimal within-relationship provision dynamics of trade credit can be uniquely determined. We obtain empirical evidence showing that in developing countries the relevance of trade credit in buyers' payment schedules has risen over-proportionally in recent years.

• Item Type: MPRA Paper
• Language: English
• Keywords: Payment contracts, Trade credit, Trade dynamics, Relational contracts, Weak institutions
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

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