with Giulio Seccia
Abstract: Default on trade credit repayments is substantial, about 7% in the U.S. This paper studies the role of trade-credit default in the transmission of macro shocks. We present cyclical facts about trade credit and its defaults. We then 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. Trade credit’s role stems solely from its low seniority status. Aggregate trade-credit default is priced by input suppliers; individual bankruptcy risk is priced in by lenders supplying bank credit. A markup effect and an insurance effect are two novel mechanisms behind our findings. First, in reflecting trade-credit default spillovers, endogenous shifts in the markup charged by intermediate input suppliers contribute materially to the size of fluctuations. Second, via the interplay of the markup and insurance channels, tradecredit default amplifies the impact of financial shocks and TFP shocks, but dampens that of volatility shocks.
Updated draft May 2024 - download