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Towards a theory of trade finance

Authors
Journal
Journal of International Economics
0022-1996
Publisher
Elsevier
Volume
91
Issue
1
Identifiers
DOI: 10.1016/j.jinteco.2013.04.005
Keywords
  • Trade Finance
  • Payment Contracts
  • Trade Patterns
  • Distance Interaction
Disciplines
  • Economics

Abstract

Abstract Shipping goods internationally is risky and takes time. To allocate risk and to finance the time gap between production and sale, a range of payment contracts is utilized. I study the optimal choice between these payment contracts and their 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 proportional to the time needed for trade. Empirical results from gravity regressions are in line with the model, highly significant and economically relevant. They suggest that importer finance is as important for trade as exporter finance.

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