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Rev Fin 1997; 10:903-937
© 1997 the Society for Financial Studies

Article

Trade credit and credit rationing

B Biaisz and C Gollier
IDEI, Universite de Toulouse, Place Anatole France, 31000 Toulouse, France
z Corresponding author e-mail: biais@cict.fr

Abstract

Asymmetric information between banks and firms can preclude financing of valuable projects. Trade credit can alleviate this problem by incorporating the lending relation the private information held by suppliers about their customers. Incentive compatibility conditions prevent collusion between two of the agents (e.g., the buyer and the seller) against the third (e.g., the bank). Consistent with the empirical findings of Petersen and Rajan (1995), firms without relationships with banks resort more to trade credit, and sellers with greater ability to generate cash flows provide more trade credit. Finally small firms react to monetary contractions by using trade credit, consistent with the empirical results of Nilsen (1994).


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