Towards a Theory of Trade Finance

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.

International Trade, Multinational Activity, and Corporate Finance

“…The static version of the model is similar to the one in Schmidt-Eisenlohr (2013). To incorporate the dynamic impact of trade partnerships, the theoretical framework assumes that some importers are patient and honor contracts, while others experience liquidity shocks and renege on contracts that are not enforced when a shock occurs.…”

The Private Export Credit Insurance Effect on Trade

“…Recent theories of trade finance identify the endogenous emergence of the optimal payment contract between trading partners (Antr‘a ()s and Foley, 2011; Schmidt‐Eisenlohr, ). In particular, these studies show that the type of arrangement chosen depends on the financing costs and (contract) enforcement in both the exporting and importing country.…”

“…The first variable measures the relative financing costs within a country‐pair and is equal to 1 if financing costs in the exporting country are higher than in the importing country. I follow Schmidt‐Eisenlohr () and use the net interest margin from Beck et al ()—the ratio between the accounting value of the net interest revenues of banks and their total earning assets—as a measure of relative financing costs. The second variable measures the relative enforcement within a country‐pair and is equal to 1 if enforcement in the exporting country is higher than in the importing country.…”

“…See Ahn () and Schmidt‐Eisenlohr () for two other recently developed models of trade finance. Both models assume that firms are risk neutral and do not demand export credit insurance.…”

Trade Credits and Bank Credits in International Trade: Substitutes or Complements?

“…() provide empirical evidence for the importance of financial constraints in international trade. While these studies have focused only on bank credit as a source of external finance, other recent papers also add supplier credits to the analysis (Ahn, ; Antràs and Foley, ; Schmidt‐Eisenlohr, ). These studies focus on the optimal choice of financing modes in international trade considering supplier credits.…”