DP17282 Trade Credit and the Stability of Supply Chains

Author(s): Nuri Ersahin, Mariassunta Giannetti, Ruidi Huang
Publication Date: May 2022
Keyword(s): Natural Disasters, production networks, Supply Chains, trade credit
JEL(s): D2, E23, G3
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17282

We study how production networks adapt when idiosyncratic shocks affect the reliability of a firm in the network. Considering natural disasters, we show that affected firms extend more trade credit, especially if their customers are difficult to replace. The suppliers of affected firms facilitate the trade credit provision by extending more trade credit, especially if the relationship with the affected firm is important. On average, supply chains appear to remain stable. Customers sever their relationships with the affected firms and recur to new suppliers only when the affected firms and their suppliers are financially constrained and cannot extend trade credit.