Profitability, Trade Credit and Institutional Structure of Production

Using a novel dataset of supplier-customer relationships, I develop measures of vertical position of public and private firms in the US economy in order to test trade credit theories. Firms at higher vertical positions have higher profit margins and hold more net trade credit even after controlling for the number of competitors, suppliers, and customers. A structural estimation of the optimal contract between firms provides a strong support for the recursive moral hazard theory of trade credit (Kim and Shin, 2012). I conclude that contracting between firms and trade credit practices might have a broader scope than previously thought