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We study the impact ofQuickpay, a federal reform that indefinitely acceleratedpayments to small business contractors of the U.S. government. We find a strong di-rect effect of the reform on employment growth at the firm-level. Importantly, how-ever, we also document substantial crowding out of non-treated firms’ employmentwithin local labor markets. While the overall net employment effect was positive,it was close to zero in tight labor markets – where crowding out was stronger. Ourresults highlight an important channel for alleviating financing constraints in smallfirms, but also emphasize the general-equilibrium effects of large-scale interventions,which can lead to lower aggregate outcomes depending on labor market conditions.

We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive‐backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex‐post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive‐backed products, even for individual machines financed by banks. Although motivated as a rent‐seeking device, captive financing generates positive spillovers by relaxing credit constraints.

We present evidence that restrictions to the set of feasible financial contracts affect buyer-supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within-product difference-in-differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.

Long payment terms are a strong impediment to the entry and survival of liquidity-constrained firms. To test this idea and its implications, I consider the effect of a reform restricting the trade credit supply of French trucking firms. In a difference-in-differences setting, I find that trucking firms' corporate default probability decreases by 25% following the restriction. The effect is persistent, concentrated among liquidity-constrained firms, and not offset by a decrease in profits. The restriction also triggers an increase in the entry of small trucking firms.

Conglomerates, trade credit arrangements, and banks are all instances of financial intermediation. However, these institutions differ significantly in the extent to which the projects financed absorb aggregate intermediary risk, in whether or not intermediation is carried out by a financial specialist, in the type of projects they fund and in the type of claims they issue to investors. The paper develops a simple unified model that both accounts for the continued coexistence of these different forms of intermediation, and explains why they differ. Specific applications to conglomerate firms, trade credit, and banking are discussed. CONGLOMERATES, TRADE CREDIT ARRANGEMENTS, AND BANKS are all instances of financial intermediation. In each case, the conglomerate headquarters/supplier/bank obtains funds by selling financial securities, while in turn providing funds in exchange for a claim on project cash flows. 1 However, in spite of the fundamental similarity between these forms of financial intermediation, important differences exist between them. In particular

This paper develops optimal pricing, lending, and renegotiation strategies for companies in relationships where one firm is highly dependent on the other. Long-term trade—creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors. Anticipating these larger renegotiation concessions, not only do less financially stable firms prefer trade credit, but all firms agree to pay a higher interest rate for trade credit. The model also explains the existence of “teaser” interest rates and convenience classes. Findings are consistent with those of the relationship-lending literature.

Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firm's basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two-part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness. TRADE CREDIT HAS IMPORTANT ECONOMIC SIGNIFICANCE from both micro- and macroeconomic perspectives. During the 1990s vendor financing has accounted for an average $1.5 trillion of the book value of all assets of U.S. corporations and has represented approximately 2.5 times the combined value of all new public debt and primary equity issues during a given year. As a component of the money supply, trade credit, in the form of accounts payable, exceeds the primary money supply (MI) by a factor of 1.5 on average.1 Clearly, efforts to control economic growth through monetary policy can be confounded by aggregate decisions of businesses to increase or decrease reliance on trade-credit financing. Several recent empirical studies examine determinants of firm reliance on trade credit.2 These studies model supply and demand for trade credit using financial-statement data (accounts receivable and payable).3 However, many aspects of trade-credit practice are unexplored. Most notably, little is known about the types of credit terms (e.g., net 30, 2/10 net 30) and credit policies that are observed across firms and industries. The only comprehensive doc

Commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held. By offering trade credit, a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short-term financing. The information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments. TRADITIONAL EXPLANATIONS FOR THE widespread use of trade credit fall into two categories. The financing motive holds that capital market imperfections enable sellers to finance buyer purchases at lower cost than financial institutions. Ferris [4] argues that trade credit provides payment flexibility and thus reduces the overall need for buyers and sellers to maintain precautionary balances. Emery [3] contends that noncompetitive rents of financial institutions can be circumvented by sellers and buyers through provision of trade credit. However, the financing motive is not sufficient to explain why small suppliers offer trade credit, the wide cross-sectional variation in terms, or why large buyers often take the "prompt payment discount" late. A second set of explanations is best described as pricing motivations for trade credit provision. Nadiri [10] argues that availability of alternative payment terms can increase product demand but does not indicate why the offered terms could not be duplicated by financial institutions. Schwartz and Whitcomb [14] argue that trade credit is used to circumvent Robinson-Patman and similar prohibitions on price discrimination. The correctness of this position depends on the charge to users of trade credit exceeding the cost of provision by the seller.' Although the explanation is possible in principle, an empirical question remains as to why variations in actual credit terms appear to be based on product market, rather than buyer, characteristics. The literature also contains analyses of the impact of changing macroeconomic conditions on trade credit terms and aggregate credit flows. Schwartz [13], for example, employs a financing motive for trade credit to conclude that restrictive monetary policy can be partly mitigated by liberalization of trade credit terms by firms with relatively easy access to capital markets. However, a microeconomic

In this paper, we show that taxes motivate the flow of trade credit without involving the assumption of credit market imperfections. The direction of trade credit flow depends on the distribution of marginal tax rates among buyers and sellers. In equilibrium, the trade credit decision follows a tax-induced clientele on both the supply and demand side. A GLANCE AT the balance sheet of a typical corporation reveals the sizeable investment firms make in accounts receivable.1 In spite of its quantitative importance, the analysis of trade credit policy figures far less prominently than other corporate policies in the finance literature. Although there exists a body of literature on the subject, its focus is on the monetary policy implications of trade credit flow; and therefore holds only indirect relevance to micro aspects such as the trade credit decision as part of corporate policy. In this paper, we examine the trade credit decision as a short-term financing decision. The decision to either grant or issue trade debt is analyzed in the familiar framework of Miller [12]. This approach establishes the link between existing paradigms on the financing of firms and the formulation of trade credit policies. The existing literature provides three possible motives for trade credit. They are, respectively, the transaction motive, the price motive, and the financial motive. The first two motives have been discussed extensively elsewhere; see, for example, Smith [18] for a summary. It is at the third motive, the financial motive, that the present paper is directed.2 Past studies on the financial motive such as Brechling and Lipsey [3], Jaffee and Modigliani [7], Laffer [10], Schwartz [15], and Schwartz and Whitcomb [16

SEVERAL SCHOLARLY STUDIES are available on the sales financing of automobiles. Since nothing comparable exists for major home appliances, it appeared that an institutional study of their financing might be of some value. Major home appliances-the big kitchen and laundry appliances, radios, and television sets-are of significance in our economy and daily living. More than 45 million American families own, on the average, six major appliances; the total represents some $30 billion in unused consumer capital. Retail sales, mostly replacement, amount to more than $4 billion yearly and support nearly 100 appliance manufacturers, employing more than 300,000 workers, 3,000 distributors, and 30,000 dealers. Major appliances are durables of high unit value. They are especially useful for young families with children. Most of these families have inadequate incomes and reserves to acquire all desired consumer durables at once. Some 75 per cent of all major appliances are bought with credit. More than half are purchased with short-term instalment sales credit, but long-term financing of the essential appliances as fixtures in the home is increasing. The consumers' need for financing is reflected in the trade's needs for sales and inventory financing. Appliance dealers hold to maturity about 50 per cent of their instalment contracts; the remainder is sold-about three-fourths to commercial banks and the rest to sales finance companies and other institutions. Prior to World War II, external appliance financing for middlemen and consumers was considered inadequate. Sales finance companies concentrated on the more profitable automobile financing and banks were not interested in consumer credit. Most appliance manufacturers, unlike automobile manufacturers, supported their middlemen with liberal open-account trade credit. Today, most of the middlemen and consumers have adequate

A LARGE PART of the fluctuation during postwar business cycles, especially during cycle contractions, has been composed of changes in manufacturers' inventories. The important role of inventory liquidation in recession has led to a number of studies in recent years, several of which have included financial variables to represent the effects of liquidity, credit availability, and interest costs on inventory behavior. Results have been either negative or inconclusive, implying that the instruments of stabilization policy that might influence inventory behavior through financial variables are unlikely to be effective. Results of these studies are dependent not only on the way in which statistical problems are handled, but also on the validity of the explicit or implicit formulation for sales expectations included in the estimating equations, on the lag structure relating previous changes in the explanatory variables to present inventory behavior, and on the specification of the financial variables examined. In particular, review of the usual proxy measures for liquidity and credit availability-the quick ratio and excess lending capacity of commercial banks-suggests that broader measures of the internal and external funds available for financing inventories might be more appropriate'than the ones used in these analyses. Also, inventory reaction to changes in the interest rate or to changes in the other financial variables is probably neither simultaneous nor likely to take place during a single, short period, though this was assumed in several of these earlier works. For these reasons, other proxies for liquidity and credit availability are considered in this study, and a number of different lags and systems of distributed lags are employed when previous changes in the explanatory variables are related to this period's inventories. Financial variables designed to represent liquidity ("internal finance"), credit availability ("external finance"), and inventory holding costs (interest rate) are included in the flexible-accelerator or capital-stock-adjustment model used in this study. "Internal finance" is defined as the sum of net retained earnings plus depreciation and depletion allowances; "external finance" includes net trade credit, long-term debt, and equity financing as well as bank loans; and interest costs are represented by rates on short-term business loans of commercial banks. Firms are assumed to adjust stocks so as partly to reduce discrepancies between actual and desired inventory levels. The desired or target levels are, in turn, a function of sales expectations and the financial variables. Since sales expectations are not always fulfilled, and since the adjustment is partial rather than complete, the process is one of gradual approximation to a continually changing target. The model was applied, in a series of estimating equations, to quarterly United States data for durable manufacturers' and all manufacturers' stocks during the 1947-61 period. Different versions of the model were tested to determine the effects of in