If entrepreneurs have private information about factors influencing the outcome of an investment, individual lending is inefficient. The literature typically offers solutions based on the assumption of full peer information to solve adverse selection problems and peer monitoring to solve moral...

Delayed payment (trade credit) and prepayment are widely observed forms of interfirm credit. We propose a simple theory to account for the prevalence of such credit. A downstream firm trades off inventory holding costs against lost sales. Lost final sales impose a negative externality on the...