Interest Rates in Trade Credit Markets

Despite strong evidence that suppliers of inputs are usually informed lenders, the cost of trade credit rarely varies with borrowing firm characteristics. We solve this puzzle by demonstrating that it is optimal for suppliers to keep riskier firms indifferent between trade credit and loans from uninformed banks. Because these bank loans are likely to vary across industries but not with firm characteristics, the same pattern applies to the cost of trade credit. The model predicts that the cost of trade credit is more likely to vary with firm characteristics in industries that are plagued by moral hazard problems or economic distress