search query: @author Jain, N. / total: 3
reference: 1 / 3
« previous | next »
| Author: | Jain, N. |
| Title: | Monitoring costs and trade credit |
| Journal: | Quarterly Review of Economics and Finance
2001 : SPRING, VOL. 41:1, p. 89-110 |
| Index terms: | ECONOMICS COSTS TRADE CREDIT |
| Language: | eng |
| Abstract: | This paper addresses the question of why nonfinancial firms engage in lending to their business partners. Such lending or trade credit is modeled as a second layer of financial intermediation. It is shown that when it is costly for a bank to inspect the borrower's revenue but not for the borrower's business partner, then saving in monitoring costs due to the business partner's informational advantage may lead to trade credit. The trade off is between monitoring fewer firms and monitoring larger firms that may entail an adverse scale effect. The results are consistent with the existing empirical evidence in bankruptcy costs and on the incidence of trade credit. Welfare analysis in terms of total surplus shows that the equilibrium lending arrangement is not necessarily optimal. |
« previous | next »
SCIMA