Customer Market Power and the Provision of Trade Credit : Evidence from Eastern Europe and Central Asia
Statistics show that the sale of goods on credit is widespread among firms even when they are capital constrained and thus face relatively high costs in providing trade credit. This study provides an explanation for this by arguing that customers w...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2007/07/7965080/customer-market-power-provision-trade-credit-evidence-eastern-europe-central-asia http://hdl.handle.net/10986/7477 |
| Summary: | Statistics show that the sale of goods
on credit is widespread among firms even when they are
capital constrained and thus face relatively high costs in
providing trade credit. This study provides an explanation
for this by arguing that customers who possess strong market
power are able to increase their customer surplus by
demanding to purchase the goods on credit. This gain in
customer surplus increases with the degree of asymmetric
information between buyer and seller with respect to product
quality. Therefore, firms that are perceived as risky are
especially subject to the market power of the customer and
have to sell their goods on credit. Using detailed
firm-level data from a large number of firms in Eastern
Europe and Central Asia, this study finds evidence
consistent with this hypothesis. It finds a strong positive
correlation between customer market power and trade credit
provision. Furthermore, this relationship is especially
strong when the supplier is more risky and in countries with
limited financial sector development or a weak legal system. |
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