Vertical Relations Under Credit Constraints.

Conference item

We model the impact credit constraints and market risk have on the vertical relationships between …rms in the supply chain. Firms which might face credit con- straints in future investments become endogenously risk averse when accumulating pledgable income. In the short run, the optimal supply contract therefore involves risk sharing, thereby inducing double marginalization. Credit constraints thus result in higher retail prices. The model o¤ers a concise explanation for several empirical regularities of …rm behavior. We demonstrate an intrinsic complementarity between supply and lending providing a theory of …nance arms of major suppliers; a mon- etary transmission mechanism linking the cost of borrowing with short-run retail prices that can help explain the price puzzle in macroeconomics; a theory of coun- tervailing power based on credit constraints; and a motive for outsourcing supply (or distribution) in the face of market risk.

Authors: Nocke, V; Thanassoulis, J

• Publication date: 2009-01-01
• Event title: 8th Conference on Research on Economic Theory & Econometrics (8-12 July 2009 : Tinos (Crete))
• Event location: Tinos (Crete)
• Language: English