DP18500 Production Networks and Trade credit
I review the empirical and theoretical literature on trade credit. I identify two main strands of the literature, which focus, respectively, on expensive trade credit to financially constrained firms and on cheap trade credit to customers with high bargaining power. It emerges that trade credit is sometimes an instrument to mitigate financial frictions and ease access to external finance for customers. However, the ability to extend trade credit is also a source of comparative advantage for suppliers and can affect competition in downstream markets. I highlight the consequences of trade credit usage for monetary policy transmission and industrial structure and highlight new avenues of research, which take into account how trade credit affects the stability of production networks.
