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Speaker:
Xavier Mateos-Planas (Queen Mary University of London)

Trade Credit Default

Abstract: Recent micro evidence shows that failure of trade credit repayments is substantial. What is the role of trade credit default in the transmission of macroeconomic shocks? We build a heterogeneous-firms quantitative model where an intermediate input is purchased by final-goods producers partly on trade credit before observing the realisation of their productivity. A bad productivity shock may ex-post induce final good producers to skip payment to suppliers or, alternatively, liquidate via bankruptcy. Aggregate trade credit delinquency and liquidation are taken into account by input suppliers; the individual liquidation risk is priced in by lenders supplying bank credit. The response of trade credit delinquency and bankruptcy, via their effect on intermediate input supplier’s markups, provides an amplification mechanism of aggregate shocks. In a calibrated version of the model, the surge in trade credit default that follows a negative productivity shock accounts for a large portion of the fall in output and employment, and feeds into further firm liquidation and delinquency. It fully explains the countercyclical markup. The size of the amplification effects depends on the extent of short-run frictions to entry.

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