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Trade Credits under Imperfect Enforcement: A Theory with a Test on Chinese Experience

Author

Listed:
  • Yanagawa, Noriyuki
  • Ito, Seiro
  • Watanabe, Mariko

Abstract

It is widely recognized that trade credit is an important financial mechanism, particularly in developing economies and transition economies where institutions are weak. This paper documents theoretical analysis and empirical accounts on what facilitates an effective supply of trade credit based on original surveys conducted in P.R. of China. Our theory predicts that trade volume and trade credit are increasing function of cash held by the buyer and enforcement technology of the seller. Furthermore, if the state sector’s enforcement technology is high, it has positive external effect to expand the volumes of trade credit and trades in the whole economy. From the data, we found that government made active commitment in enforcement of trade credit contract and the government owned firms are main supplier and receivers of trade credit, which suggest that enforcement by government and state sector were effective against presumptions in the previous literatures.

Suggested Citation

  • Yanagawa, Noriyuki & Ito, Seiro & Watanabe, Mariko, 2006. "Trade Credits under Imperfect Enforcement: A Theory with a Test on Chinese Experience," IDE Discussion Papers 58, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    • Handle: RePEc:jet:dpaper:dpaper58
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    File URL: https://ir.ide.go.jp/?action=repository_action_common_download&item_id=38108&item_no=1&attribute_id=22&file_no=1
    File Function: First version, 2006
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    More about this item

    Keywords

    Law and finance; Economic growth; Incomplete contract; Enforcement; Trade policy; Credit; China; 経済成長; 貿易政策; 信用; 中国;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • K0 - Law and Economics - - General
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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