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American Economic Journal: Microeconomics: Vol. 3 No. 1 (February 2011)

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Ensuring Sales: A Theory of Inter-firm Credit

Article 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

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)

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Authors

Daripa, Arup (Birkbeck, U London)
Nilsen, Jeffrey (American U Bulgaria)

JEL Classifications

D21: Firm Behavior: Theory
D62: Externalities
D92: Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
L25: Firm Performance: Size, Diversification, and Scope

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