What question did this study set out to answer?

To examine how market frictions, specifically the search costs for trading partners and the absence of legal contract enforcement, shape relational contracting and informal trade credit.

November 1, 1999The Quarterly Journal of Economics

Interfirm Relationships and Informal Credit in Vietnam

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Authors

JMJohn McMillanAustralian National University CWChristopher WoodruffUniversity of Peradeniya

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Implication

Empirical analysis reveals mechanisms driving informal credit provision among private firms, indicating that business networks enforce contracts when legal systems fail.

Key Points

To examine how market frictions, specifically the search costs for trading partners and the absence of legal contract enforcement, shape relational contracting and informal trade credit.
Analyzed trading relationships and credit arrangements among emerging private sector firms operating without formal legal contract enforcement.
Evaluated the impact of relationship duration, search frictions for alternative suppliers, prior information gathering, and business network connections on informal credit size.
Suppliers extend credit when customers face high friction in finding alternative suppliers, effectively using lock-in as an informal enforcement mechanism.
Relationship duration and prior information gathering correlate positively with the amount of informal trade credit extended.
Customers sourced through established business networks receive significantly more credit, demonstrating that network ties provide persistent sanctions against default.

Cite This Study

McMillan et al. (1999) studied this question.

synapsesocial.com/papers/69dabc33aae38ff6ad836315 https://doi.org/10.1162/003355399556278

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Implication

Empirical analysis reveals mechanisms driving informal credit provision among private firms, indicating that business networks enforce contracts when legal systems fail.

Interfirm Relationships and Informal Credit in Vietnam

Discussion

Member takes

Implication

Key Points

Cite This Study

Interfirm Relationships and Informal Credit in Vietnam

Discussion

Member takes

Implication

Key Points

Cite This Study

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