Publication: Trade Credit Contracts
Loading...
Published
2011-07-01
ISSN
Date
2012-03-19
Author(s)
Editor(s)
Abstract
The authors employ a novel dataset on almost 30,000 trade credit contracts to describe the broad characteristics of the parties that contract together; the key contractual terms, such as the discount for early payment; and the days by when payment is due. Whereas prior work has typically used information on only one side of the buyer-seller transaction, this paper utilizes information on both. The authors find that the largest and most creditworthy buyers receive contracts with the longest maturities from smaller suppliers, with the latter extending credit to the former perhaps as a way of certifying product quality. Discounts for early payment seem to be offered to riskier buyers to limit the potential nonpayment risk when credit is extended for non-financial reasons.
Link to Data Set
Citation
“Laeven, Luc; Klapper, Leora; Rajan, Raghuram. 2011. Trade Credit Contracts. Policy Research working paper ; no. WPS 5726. © World Bank. http://hdl.handle.net/10986/3490 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication The Economic Value of Weather Forecasts: A Quantitative Systematic Literature Review(Washington, DC: World Bank, 2025-09-10)This study systematically reviews the literature that quantifies the economic benefits of weather observations and forecasts in four weather-dependent economic sectors: agriculture, energy, transport, and disaster-risk management. The review covers 175 peer-reviewed journal articles and 15 policy reports. Findings show that the literature is concentrated in high-income countries and most studies use theoretical models, followed by observational and then experimental research designs. Forecast horizons studied, meteorological variables and services, and monetization techniques vary markedly by sector. Estimated benefits even within specific subsectors span several orders of magnitude and broad uncertainty ranges. An econometric meta-analysis suggests that theoretical studies and studies in richer countries tend to report significantly larger values. Barriers that hinder value realization are identified on both the provider and user sides, with inadequate relevance, weak dissemination, and limited ability to act recurring across sectors. Policy reports rely heavily on back-of-the-envelope or recursive benefit-transfer estimates, rather than on the methods and results of the peer-reviewed literature, revealing a science-to-policy gap. These findings suggest substantial socioeconomic potential of hydrometeorological services around the world, but also knowledge gaps that require more valuation studies focusing on low- and middle-income countries, addressing provider- and user-side barriers and employing rigorous empirical valuation methods to complement and validate theoretical models.Publication It’s Not (Just) the Tariffs: Rethinking Non-Tariff Measures in a Fragmented Global Economy(Washington, DC: World Bank, 2025-10-22)As tariffs have declined, non-tariff measures (NTMs) have become central to trade policy, especially in high-income countries and regulated sectors like food and green technologies. Although NTMs may serve legitimate goals, they could also sort countries and firms into or out of markets based on compliance capacity and differences in product mix. Documenting recent advances in the estimation of ad valorem equivalents (AVEs), this paper uncovers new patterns of use and exposure of NTMs. High-income countries rely more heavily on NTMs relative to tariffs, while low- and middle-income countries face steeper AVEs on their exports. Firm-level evidence shows that NTMs disproportionately affect smaller firms, leading to market exit and concentration. Poorly designed NTMs can harm productivity and welfare, while coordinated, capacity-aware use can deliver inclusive outcomes. Policy design, transparency, and diagnostics must evolve to reflect the growing role—and risks—of NTMs in a fragmented global trade landscape.Publication Monitoring Global Aid Flows: A Novel Approach Using Large Language Models(Washington, DC: World Bank, 2025-11-04)Effective monitoring of development aid is the foundation for assessing the alignment of flows with their intended development objectives. Existing reporting systems, such as the Organisation for Economic Co-operation and Development’s Creditor Reporting System, provide standardized classification of aid activities but have limitations when it comes to capturing new areas like climate change, digitalization, and other cross-cutting themes. This paper proposes a bottom-up, unsupervised machine learning framework that leverages textual descriptions of aid projects to generate highly granular activity clusters. Using the 2021 Creditor Reporting System data set of nearly 400,000 records, the model produces 841 clusters, which are then grouped into 80 subsectors. These clusters reveal 36 emerging aid areas not tracked in the current Creditor Reporting System taxonomy, allow unpacking of “multi-sectoral” and “sector not specified” classifications, and enable estimation of flows to new themes, including World Bank Global Challenge Programs, International Development Association–20 Special Themes, and Cross-Cutting Issues. Validation against both Creditor Reporting System benchmarks and International Development Association commitment data demonstrates robustness. This approach illustrates how machine learning and the new advances in large language models can enhance the monitoring of global aid flows and inform future improvements in aid classification and reporting. It offers a useful tool that can support more responsive and evidence-based decision-making, helping to better align resources with evolving development priorities.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication The State of Global Services Trade Policies: Evidence from Recent Data(Washington, DC: World Bank, 2025-10-28)The economic environment for services trade has changed dramatically over the past 15 years, driven by rapid technological progress that has expanded the possibilities for exchanging services. How has trade policy responded to these changes? How do policy stances in a wide range of service sectors compare across economies? With its unprecedented global coverage, the Services Trade Policy Database and the associated Services Trade Restrictions Index, developed jointly by the World Bank and the World Trade Organization, help address these questions. This paper makes three principal contributions. First, it offers an in-depth discussion of the current state of services trade policies and their differences across 134 economies and 34 services subsectors. Second, the paper reveals how recent (2016–22) changes in policy stances have seen progressive liberalization by lower-income economies but stabilization or even slight policy reversals in high-income economies. This dynamic differs fundamentally from the trend that unfolded after the Great Recession over 2008–16. Third, the paper shows the implications of policy changes over the past six years on services trade costs, and it showcases how the Services Trade Policy Database’s regulatory information can inform trade negotiations, regulatory analysis, and policy making. Alongside these contributions, the paper documents updates to the Services Trade Policy Database’s economy and sector coverage and explains the latest methodological improvements made to the World Bank–World Trade Organization Services Trade Restrictions Index.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Trade Credit Contracts(2010-06-01)This paper provides new evidence on the unique role of trade credit and contracting terms as a way for both sellers and buyers to mange business risk. The authors use a novel and unique dataset on almost 30,000 supplier contracts for 56 large buyers and more than 24,000 suppliers in Europe and North America. The sample of buyers and suppliers includes firms of varying size, investment grade, and sectors. The paper finds evidence in support of four important, and not mutually exclusive, reasons for trade credit: 1) as a method of financing; 2) as a means of price discrimination; 3) as a bond assuring buyers of product quality; and 4) as a screening mechanism to gauge buyer default risk. In particular, the analysis finds that the largest and most creditworthy buyers receive contracts with the longest maturities, as measured by net days, from smaller, investment grade suppliers. In comparison, early payment discounts seem to be used as a risk management tool to limit the potential nonpayment risk of trade credit. Early payment discounts are generally offered to smaller, non-investment grade buyers. The results suggest that contract terms are jointly determined by supplier and buyer characteristics.Publication Facilitating SME Financing through Improved Credit Reporting(World Bank, Washington, DC, 2014-05)The general principles for credit reporting were issued by the World Bank in September 2011. Since then, the World Bank and the international committee on credit reporting (ICCR) have been leading efforts towards the implementation of the general principles worldwide. This report is one of the concrete outputs of the work following the general principles. It addresses one of the most significant problems that limit the ability of most small and medium enterprises (SMEs) around the world to obtain adequate external financing to underpin their productive activities: information asymmetries. Creditors assess the creditworthiness of credit and loan applicants based on two basic criteria: ones financial capacity or ability to repay a loan, and ones willingness to repay the loan. A credit reporting system s (CRS) basic objective is to address information asymmetries, which is crucial for determining repayment capacity and repayment willingness. Credit reporting can therefore be extremely valuable to creditors for enhanced, fact-based credit risk assessments, and in this sense can also be seen as a tool to facilitate access to financing, including by SMEs. The main objective of this report is therefore to identify actions that can be undertaken by authorities and other relevant policy makers to improve the flow of data and other relevant credit information on SMEs to creditors through CRS. For this purpose, the report first analyses the overall status of credit reporting activities in connection with SMEs.Publication Trade Finance during the Great Trade Collapse(World Bank, 2011-06-22)The bursting of the subprime mortgage market in the United States in 2008 and the ensuing global financial crisis were associated with a rapid decline in global trade. The extent of the trade collapse was unprecedented: trade flows fell at a faster rate than had been observed even in the early years of the great depression. G-20 leaders held their first crisis-related summit in November 2008. The goal was to understand the root causes of the global crisis and to reach consensus on actions to address its immediate effects. In the case of trade, a key question concerned the extent to which a drying up of trade finance caused the observed decline in trade flows. This book brings together a range of projects and studies undertaken by development institutions, export credit agencies, private bankers, and academics to shed light on the role of trade finance in the 2008-09 great trade collapse. It provides policy makers, analysts, and other interested parties with analyses and assessments of the role of governments and institutions in restoring trade finance markets. A deeper understanding of the complexity of trade finance remains critical as the world economy recovers and the supply of trade finance improves. The international community continues to know too little about the fragility of low income economies in response to trade finance developments and shocks, as well as about the ability and conditions of access to trade finance by small and medium enterprises and small banks in developing countries. Similarly, there is uncertainty regarding the impact on trade finance of recent changes in the third Basel regulatory framework.Publication Market Power and the Matching of Trade Credit Terms(World Bank, Washington, DC, 2008-10)This paper studies the decision of firms to extend trade credit to customers and its relation with their financing decisions. The authors use a novel firm-level database of Chinese SMEs with unique information on market power in both output and input markets and on the amount, terms, and payment history of trade credit simultaneously extended to customers (accounts receivable) and received from suppliers (accounts payable). The analysis shows that suppliers with relatively weaker market power are more likely to extend trade credit and have a larger share of goods sold on credit. Examination of the importance of financial constraints reveals that access to bank financing and profitability are not significantly related to trade credit supply. Rather, firms that receive trade credit from their own suppliers are more likely to extend trade credit to their customers, and to "match maturity" between the contract terms of payables and receivables. This matching practice is more likely used when firms face strong competition in the product market (relative to their customers), and enjoy strong market power in the input market (relative to their suppliers). These results highlight the importance of supply chain financing for market competition and risk management in credit constrained firms.Publication Colombia : Bank Financing to Small- and Medium-Sized Enterprises (SMEs) in Colombia(Washington, DC, 2007-12)Small-and Medium-Sized Enterprises (SMEs) represent an important part of the Colombian economy, although they are not well documented in official statistics. In particular, there does not exist sufficient periodic data as to their characteristics, evolution, or overall contribution to the economy - in most cases, SMEs tend to be bundled together with micro enterprises in official statistics. The true size of the market is understated due to informality. Lack of access to finance has been cited as an important problem in recent surveys. However, there are significant differences in perceptions as to the size and causes of the financing gap. While there is strong evidence to support its existence following the 1999 crisis, the significant growth of this market in recent years raises some questions as to whether such perceptions remain valid. One of the lessons of the last few years is that banks will expand SME lending on their own accord - in spite of the presence of important constraints - when they perceive the attractiveness of this market and have begun to saturate easier (in terms of business model) market segments such as corporate and consumer lending. However, in order to ensure the sustainable growth of this market, continued strong macroeconomic performance and a stable and consistent policy framework in the financial sector have been identified as important considerations.
Users also downloaded
Showing related downloaded files
Publication The Journey Ahead(Washington, DC: World Bank, 2024-10-31)The Journey Ahead: Supporting Successful Migration in Europe and Central Asia provides an in-depth analysis of international migration in Europe and Central Asia (ECA) and the implications for policy making. By identifying challenges and opportunities associated with migration in the region, it aims to inform a more nuanced, evidencebased debate on the costs and benefits of cross-border mobility. Using data-driven insights and new analysis, the report shows that migration has been an engine of prosperity and has helped address some of ECA’s demographic and socioeconomic disparities. Yet, migration’s full economic potential remains untapped. The report identifies multiple barriers keeping migration from achieving its full potential. Crucially, it argues that policies in both origin and destination countries can help maximize the development impacts of migration and effectively manage the economic, social, and political costs. Drawing from a wide range of literature, country experiences, and novel analysis, The Journey Ahead presents actionable policy options to enhance the benefits of migration for destination and origin countries and migrants themselves. Some measures can be taken unilaterally by countries, whereas others require close bilateral or regional coordination. The recommendations are tailored to different types of migration— forced displacement as well as high-skilled and low-skilled economic migration—and from the perspectives of both sending and receiving countries. This report serves as a comprehensive resource for governments, development partners, and other stakeholders throughout Europe and Central Asia, where the richness and diversity of migration experiences provide valuable insights for policy makers in other regions of the world.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication Europe and Central Asia Economic Update, Fall 2024: Better Education for Stronger Growth(Washington, DC: World Bank, 2024-10-17)Economic growth in Europe and Central Asia (ECA) is likely to moderate from 3.5 percent in 2023 to 3.3 percent this year. This is significantly weaker than the 4.1 percent average growth in 2000-19. Growth this year is driven by expansionary fiscal policies and strong private consumption. External demand is less favorable because of weak economic expansion in major trading partners, like the European Union. Growth is likely to slow further in 2025, mostly because of the easing of expansion in the Russian Federation and Turkiye. This Europe and Central Asia Economic Update calls for a major overhaul of education systems across the region, particularly higher education, to unleash the talent needed to reinvigorate growth and boost convergence with high-income countries. Universities in the region suffer from poor management, outdated curricula, and inadequate funding and infrastructure. A mismatch between graduates' skills and the skills employers are seeking leads to wasted potential and contributes to the region's brain drain. Reversing the decline in the quality of education will require prioritizing improvements in teacher training, updated curricula, and investment in educational infrastructure. In higher education, reforms are needed to consolidate university systems, integrate them with research centers, and provide reskilling opportunities for adult workers.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication Global Economic Prospects, June 2024(Washington, DC: World Bank, 2024-06-11)After several years of negative shocks, global growth is expected to hold steady in 2024 and then edge up in the next couple of years, in part aided by cautious monetary policy easing as inflation gradually declines. However, economic prospects are envisaged to remain tepid, especially in the most vulnerable countries. Risks to the outlook, while more balanced, are still tilted to the downside, including the possibility of escalating geopolitical tensions, further trade fragmentation, and higher-for-longer interest rates. Natural disasters related to climate change could also hinder activity. Subdued growth prospects across many emerging market and developing economies and continued risks underscore the need for decisive policy action at the global and national levels. Global Economic Prospects is a World Bank Group Flagship Report that examines global economic developments and prospects, with a special focus on emerging market and developing economies, on a semiannual basis (in January and June). Each edition includes analytical pieces on topical policy challenges faced by these economies.