Trade Credit and the Stability of Supply Chains

Abstract

We study how production networks adapt when natural disasters affect the reliability of a firm in the network. Affected firms extend more trade credit to their customers, especially if these customers are important and would be difficult to replace. The suppliers of affected firms appear to facilitate the trade credit provision by extending more trade credit, especially if the relationship with the affected firm is important. Thanks to trade credit provision, supply chains appear to be stable after natural disasters. Customers sever their relationships with the affected firms and recur to new suppliers only when they do not receive more trade credit, because the affected firms and their suppliers are financially constrained.