Publication: Trade Credit: Theory andEvidence for Emerging Economies and Developing Countries
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2023-06-25
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2023-06-25
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Trade credit remains an important source of finance for firms in developing countries and many firms in developed countries, especially those that are young, small, or informationally opaque for other reasons. This paper summarizes the literature and explains the pervasiveness of trade credit, detailing its potential advantages over formal credit in terms of the information that buyers and sellers have about each other and their ability to monitor one another. Because it requires less formal contract enforcement, trade credit can be especially relevant where the rule of law and the legal system are weak. At the same time, reliance on information from social networks and informal institutional arrangements limits the scale of trade credit, and thus moderate improvements to formal enforcement can expand trade credit beyond social networks and enable customers to switch suppliers, which improves their credit terms. The patterns suggest a sweet spot or “Goldilocks” region where mid-size firms and those in countries at middling levels of development tend to rely relatively more heavily on trade credit than others. Going forward, detailed data on the relationship between suppliers and customers are crucial to enable more direct tests of theoretical predictions regarding trade credit.
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“Cull, Robert; Goh, Chorching; Xu, L. Colin. 2023. Trade Credit: Theory andEvidence for Emerging Economies and Developing Countries. Policy Research Working Papers; 10468. © World Bank. http://hdl.handle.net/10986/39922 License: CC BY 3.0 IGO.”
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