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Sustaining production chains through financial linkages

Author(s): Kim, SJ; Shin, Hyun Song

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Abstract: The technological constraints on sustaining production chains have been discussed extensively by development economists, but the role of financial linkages has received less attention. In a model of recursive moral hazard for a manufacturing supply chain, we show that the structure of interlocking receivables and payables serve as the glue for the production chain that sustains complex manufacturing output. The inefficiency associated with recursive moral hazard can be mitigated through optimal delays in payments along the chain. However, efficiency requires large stocks of working capital, and invoice prices are high due to implicit amortization costs of inter-firm credit.
Publication Date: May-2012
Citation: Kim, SJ, Shin, HS. (2012). Sustaining production chains through financial linkages. American Economic Review, 102 (3), 402 - 406. doi:10.1257/aer.102.3.402
DOI: doi:10.1257/aer.102.3.402
ISSN: 0002-8282
Pages: 402 - 406
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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