Trade Credit Default

Recent micro evidence shows that default on trade credit repayments is substantial. What is the role of trade credit default in the transmission of macroeconomic shocks? We 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. A bad productivity shock may ex-post induce final good producers to skip payment to suppliers or, alternatively, liquidate via bankruptcy. Aggregate trade credit delinquency and liquidation are taken into account by input suppliers; the individual liquidation risk is priced in by lenders supplying bank credit. The response of trade-credit delinquency and bankruptcy, via their effect on intermediate input supplier’s markups, provides an amplification mechanism of aggregate shocks. We consider productivity, financial and volatility shocks. In a calibrated version of the model, the surge in trade credit default that follows a negative shock accounts for a large portion of the fall in output and employment, and feeds into further firm liquidation and delinquency. For instance, trade-credit default accounts for about one third of the impact of a volatility shock.