DP2036 Inter-Firm Relationships and Informal Credit in Vietnam

Author(s): John McMillan, Christopher Woodruff
Publication Date: December 1998
Keyword(s): Networks, Trade Credit, Vietnam
JEL(s): D23, K12, P31
Programme Areas: Industrial Organization, Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2036

Trading relations in Vietnam's emerging private sector are shaped by two market frictions: the difficulty of locating trading partners and the absence of legal enforcement of contracts. Examining relational contracting, we find that a firm trusts its customer enough to offer credit when the customer faces high costs of finding an alternative supplier. A longer duration of trading relationship is associated with larger credit, as is prior information gathering. Customers identified through business networks receive more credit. These network effects are enduring, suggesting that networks are used to sanction defaulting customers.