Abstract
The paper investigates the determinants of trade credit demand and its interactions with the input combination of the firm, within an incomplete contract setting with uncertainty, two-input technology and collateralised credit contracts. Assuming that the supplier is better able to extract value from existing assets and that she has an information advantage relative to other creditors, the paper derives the following predictions: (1) financially unconstrained firms (with unused bank credit lines) take trade credit because it is in fact cheaper than bank loans; (2) the reliance on trade credit may be invariant to the degree of credit rationing, depending on product characteristics; (3) trade credit demand (supply) varies among firms using (producing) differentiated or standardised inputs, rather than services; (4) suppliers lend goods to their customers but they do not lend them cash; (5) a larger use of trade credit goes together with an input choice biased towards tangible assets; (6) both financing and input choices respond to changes in the degree of creditor protection.
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