with Giulio Seccia
Abstract: Default on trade credit repayments is substantial, accounting for about 7% of receivable accounts in the U.S. This paper studies the role of trade-credit default in the transmission of aggregate financial shocks. We first document macro facts about trade credit and its defaults. We then develop a heterogeneous-firms quantitative model in which final-good producers purchase intermediate inputs partly on trade credit before their idiosyncratic productivity is realised. The key feature of trade credit is its low seniority. Aggregate trade-credit default is priced by input suppliers, while lenders price individual bankruptcy risk in bank credit. An insurance channel and an input-pricing channel are two novel mechanisms in the model. Steady-state effects of trade-credit default are substantial. Regarding dynamics, trade credit default amplifies a financial downturn calibrated to the Great Recession by about 80%, with amplification operating primarily through the insurance channel