Inter-firm trade finance in times of crisis

The paper discusses the main features that distinguish inter-firm international trade finance from alternative sources of financing. On the one hand, inter-firm trade finance could help overcome informational problems associated with other lending relationships; on the other, it may contribute to propagate shocks due to the interconnection among firms along credit chains. The paper evaluates the potential effects of a financial crisis on the use of trade credit for firms operating in developing countries. It argues that while the advantages of trade credit might remain largely unexploited due to poor legal institutions, the disadvantages might be exacerbated because of these firms’ greater exposure to a default chain. Based on these arguments, a menu of choices is identified for what policymakers can do to boost firms’ access to inter-firm trade finance in times of crisis.Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Economic Theory&Research,Emerging Markets

Optimal compensation contracts for optimistic managers

We study an employment contract between an (endogenously) optimistic manager and realistic investors. The manager faces a trade-off between ensuring that effort reflects accurate news and savoring emotionally beneficial good news. Investors and manager agree on optimal recollection when the weight the manager attaches to anticipatory utility is small. For intermediate values investors bear an extra-cost to make the manager recall bad news. For large weights investors renounce inducing signal recollection. We extend the analysis to the case in which anticipatory utility is the manager’s private information and derive testable predictions on the relationship between personality traits, managerial compensation and recruitment policies

The commitment problem of secured lending

The paper presents a new theory of trade credit in which firms buy inputs on credit from suppliers to restore the benefits of secured bank financing impaired by contract incompleteness. In a setting where investment is endogenous and unobservable to financiers, we show that a bank-secured credit contract is time-inconsistent. Upon being granted credit, the entrepreneur has an incentive to alter the original input combination, jeopardizing the bank’s revenues. Anticipating the entrepreneur’s opportunism, the bank offers an unsecured credit contract, reducing the surplus from the venture. One way for the entrepreneur to commit to the contract terms is to purchase inputs on credit from the supplier. The supplier observes the input investment and acts as a guarantor that inputs will be purchased as contracted, thus facilitating access to secured bank financing. The commitment role of trade credit still holds in a multi-period extension that investigates the impact of bank relationship lending on secured debt and trade credit. Our model provides novel testable predictions on optimal financial contracts in both one-period and repeated lending relationships

Trade credit, collateral liquidation, and borrowing constraints

Assuming that firms' suppliers are better able to extract value from the liquidation of assets in default and have an information advantage over other creditors, the paper derives six predictions on the use of trade credit. (1) Financially unconstrained firms (with unused bank credit lines) take trade credit to exploit the supplier's liquidation advantage. (2) If inputs purchased on account are sufficiently liquid, the reliance on trade credit does not depend on credit rationing. (3) Firms buying goods make more purchases on account than those buying services, while suppliers of services offer more trade credit than those of standardized goods. (4) Suppliers lend inputs to their customers but not cash. (5) Greater reliance on trade credit is associated with more intensive use of tangible inputs. (6) Better creditor protection decreases both the use of trade credit and input tangibility.Trade credit Collateral Financial constraints Asset tangibility Creditor protection

Efficient audits by pooling projects

In a costly state veri\u85cation model under commitment, the paper shows that jointly fi\u85nancing multiple independent projects reduces the deadweight loss of ine¢ cient audits. This is true for both simultaneous and sequential audit, since each system reveals the same information about the project outcomes at the same cost. Moreover, the audit combination under sequential audit is indeterminate. Audits are decreasing in the reported income and, for sufficiently high projects pro\u85tability, deterministic for lower income reports

Education, taxation and the perceived effects of sin good consumption

In a setting in which an agent has a behavioral bias that causes an underestimation or an overestimation of the health consequences of sin goods consumption, the paper studies how a social planner can aect the demand of such goods through education and taxation. When only optimistic consumers are present, depending on the elasticity of demand of the sin good with respect to taxation, the two instruments can be substitutes or complements. When consumers are heterogeneous, the correcting eect that taxation has on optimistic consumers has unintended distorting eects on both pessimistic and rational ones. In this framework, educational measures, by aligning biased consumers' perceptions closer to the true probability of health damages, are more eective than taxation

Inefficient taxation of sin goods

Within an O'Donoghue and Rabin (2006) style model, we study the optimal sin taxes that a government wants to implement when consumers are time-inconsistent, and taxation is inefficient in terms of administrative, collection and compliance costs. We find that, if the inefficiency of taxation is not too large, the optimal tax is positive and it may be higher or lower than the first best depending on the elasticity of demand with respect to taxation. Finally, the extent of the distortion depends on the degree of inefficiency of taxation

Liars and Inspectors: Optimal Financial Contracts When Monitoring is Non-Observable

Within a costly state verification setting, we derive the optimal financial contract between an entrepreneur, a (potentially financing) supervisor and a pure investor when there is non-verifiable and non-contractible monitoring and limited liability. We show that diversion of cash flows to the entrepreneur arises as optimal behaviour and that to get the best reporting and monitoring incentives it is crucial to separate the financing from the monitoring role. In particular, higher efficiency can be achieved by ensuring that the entrepreneur and the supervisor do not collect any cash flows in low states. These should be paid to a third party instead, the pure investor, who in exchange provides funding. However, whether the pure investor entirely finances the project (and the supervisor purely acts as a monitor) or only provides partial finance (with the supervisor cofinancing) is immaterial, as the optimal financing of the project can justify a range of alternative financial structures.