Towards a theory of Trade Finance

Schmidt-Eisenlohr, Tim (2013) Towards a theory of Trade Finance. In: Job Market Seminar, 15/02/2013, Collegio Carlo Alberto, Turin.

Full text not available from this repository.

Abstract

Shipping goods internationally is risky and takes time. Therefore, trading partners not only have to agree on the specification and the price of a good, but also on the timing of payments. To allocate risk and to finance the time gap between production and sale, a range of different payment contracts is utilized, broadly classified into exporter finance (Open Account), importer finance (Cash in Advance) and bank finance (Letter of Credit). I study the optimal choice between these three types of payment contracts considering one shot transactions, repeated transactions and implications for trade. The equilibrium contract is determined by financial market characteristics and contracting environments in both the source and the destination country. Trade increases in enforcement probabilities and decreases in financing costs. The latter effect is the larger, the longer the time needed for trade. I use a panel of bilateral trade flows to test these predictions, running gravity regressions that include interaction terms between distance and financing costs. Results are in line with the model, highly significant and economically relevant.

Item Type: Conference or Workshop Item (Paper)
Keywords: trade finance, payment contracts, trade patterns, distance interaction
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 15 Mar 2013 16:18
Last Modified: 23 Oct 2015 14:08
URI: http://eureka.sbs.ox.ac.uk/id/eprint/4438

Actions (login required)

Edit View Edit View