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  3. American Economic Journal: Microeconomics
  4. February 2011
  5. Ensuring Sales: A Theory of Inter-firm Credit

Ensuring Sales: A Theory of Inter-firm Credit

  • Arup Daripa
  • Jeffrey Nilsen
American Economic Journal: Microeconomics
vol. 3, no. 1, February 2011
(pp. 245-79)
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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.3.1.245

JEL 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
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