American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Ensuring Sales: A Theory of Inter-firm Credit
American Economic Journal: Microeconomics
vol. 3,
no. 1, February 2011
(pp. 245–79)
Abstract
We propose a simple theory to account for the prevalence of interfirm credit at an interest rate of zero. A downstream firm trades off inventory holding costs against lost sales. Lost final sales impose a negative externality on the upstream firm. The solution requires a subsidy limited by the value of inputs. Allowing the downstream firm to pay with a delay is precisely such a solution. A reverse externality accounts for the use of prepayment. We clarify how input prices vary with such policies, and when trade credit/prepayment is more efficient than pure input price adjustments. (JEL D21, D62, D92, G31, L25)Citation
Daripa, Arup, and Jeffrey Nilsen. 2011. "Ensuring Sales: A Theory of Inter-firm Credit." American Economic Journal: Microeconomics, 3 (1): 245–79. DOI: 10.1257/mic.3.1.245JEL Classification
- D21 Firm Behavior: Theory
- D62 Externalities
- D25 Intertemporal Firm Choice, Investment, Capacity, and Financing
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- L25 Firm Performance: Size, Diversification, and Scope
There are no comments for this article.
Login to Comment