Interest Rates in Trade Credit Markets

There is evidence that suppliers have private information about their customers ’ credit risk. Yet, interest rates in trade credit markets are usually industry-not-firm specific. Why? If the demand for intermediate products is inelastic, suppliers should raise interest rates until they reach their customers ’ outside option. By definition, this outside option cannot reflect infor-mation that is privy to suppliers. In contrast, a highly elastic demand may induce suppliers to extend credit to their customers at zero interest, making the suppliers ’ private information once more irrelevant. By characterizing these two equilibria, we obtain implications on when trade credit rates shouldn’t vary with private information held by suppliers