Credit Chains and Production Networks

Credit Chains and Production Networks

There are three kind of flows in a Supply Chain

  • Goods
  • Information
  • Financial


Credit Terms in a Supplier Buyer contracts determine payment delays which accumulate in current accounts of a Firm.

  • Account Receivables
  • Account Payables


Credit Relations

  • Bank to Bank
  • Bank to Firm
  • Firm to Firm

Dyad of Credit Relations

  • Supplier – Buyer


Triad of Credit Relations

  • Supplier – Bank – Buyer

Sources of Systemic Risk

  • Failure of a Firm and its impact on Suppliers and Customers (Flow of Goods)
  • Failure of a Bank and its impact on Trade Credit
  • Credit Contraction due to de-risking by the Banks
  • Decline in Correspondent Banking relations and its impact on Trade Finance


From Credit Chains and Sectoral Co-movement: Does the Use of Trade
Credit Amplify Sectoral Shocks?

Trade credit is an important source of short-term financing for firms, not only in the U.S., as documented by Petersen and Rajan (1997), but also around the World. For instance, accounts payables are larger than short-term debt in 60 percent of the countries covered by Worldscope. Also, across the world most firms simultaneously receive credit from their suppliers and grant it to their customers, which tend to be concentrated on specific sectors.  These characteristics of trade credit financing have led some authors to propose it as a mechanism for the propagation and amplification of idiosyncratic shocks. The intuition behind the mechanism is straightforward; a firm that faces a default by its customers may run into liquidity problems that force it to default to its own suppliers. Therefore, in a network of firms that borrow from each other, a temporary shock to the liquidity of some firms may cause a chain reaction in which other firms also get in financial difficulties, thus resulting in a large and persistent decline in aggregate activity. This idea was first formalized by Kiyotaki and Moore (1997) in a partial equilibrium setting, and has been recently extended to a general equilibrium environment by Cardoso-Lecourtois (2004), and Boissay (2006) who have also provided evidence of the potential quantitative importance of the mechanism by calibrating their models to the cases of Mexico and the U.S., respectively.

From Ontology of Bankruptcy Diffusion through Trade Credit

A supply network is a network of entities interacting to transform raw material into finished product for customers. Since interdependencies among supply network members on material, information, and finance are becoming increasingly intensive, financial status of one firm not only depends on its own management, but also on the performance and behaviours of other members. Therefore, understanding the financial flows variability and the material interactions is a key to quantify the risk of a firm. Due to the complex structure and dynamic interactions of modern supply networks, there are some difficulties faced by pure analysis approaches in analyzing financial status of the supply network members and the high degree of nonlinear interactions between them. Mathematical and operation research models usually do not function very well for this kind of financial decision making. These models always start with many assumptions and have difficulties modeling such complex systems that include many entities, relationships, features, parameters, and constraints. In addition, traditional modeling and analysis tools lack the ability to predict the impact of a specific event on the performance of the entire supply network.  Current financial data analysis with large volumes of structure data cannot offer the full picture and intrinsic insights into the risk nature of a company. Motivated by the literature gap in risk monitoring in investment background and limitations of analysis approaches for handling bankruptcy contagion phenomenon, we propose an ontological approach to present a formal, shared conceptualization of this domain knowledge.

From Inter-Firm Trade Finance in Times of Crisis

The severe recession that is hitting the global economy, with very low or even negative growth rates, has caused widespread contractions in international trade, both in developed and developing countries. World Trade Organization (WTO) has forecast that exports will decline by roughly 9% in volume terms in 2009 due to the collapse in global demand brought on by the biggest economic downturn in decades. The contraction in developed countries will be particularly severe with exports falling by 10%. In developing countries, which account for one-third of world trade, exports will shrink by some 2% to 3% in 2009.

The contraction in international trade has been accompanied by a sharp decline in the availability of trade finance. This decline is only partly explained by the contraction in demand: according to a BAFT (Banker’s Association for Trade and Finance) and International Monetary Fund (IMF) joint survey (2009), flows of trade finance to developed countries have fallen by 6% relative to the previous year, more than the reduction in trade flows, suggesting that part of the fall reflects a disruption of financial intermediation. The contraction in value of trade finance has also been accompanied by a sharp increase in its price. Fear that the decline in trade finance and the increase in its cost would accelerate the slowdown of world trade has triggered a number of government initiatives in support of trade finance (Chauffour and Farole,2009).

The situation is especially worrisome for firms operating in developing countries which rely heavily on trade finance to support both their exports and imports.1 With a restricted access to financing and an increased cost of financing, these firms may find difficulties in maintaining their production and trade activities.


Please see my related posts:

Supply Chain Finance (SCF) / Financial Supply Chain Management (F-SCM)

Production Chain Length and Boundary Crossings in Global Value Chains

Intra Industry Trade and International Production and Distribution Networks

Understanding Trade in Intermediate Goods

Trends in Intra Firm Trade of USA

Production and Distribution Planning : Strategic, Global, and Integrated

Development of Global Trade and Production Accounts: UN SEIGA Initiative

The Dollar Shortage, Again! in International Wholesale Money Markets

FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms

The Collapse of Global Trade during Global Financial Crisis of 2008-2009

Understanding Global Value Chains – G20/OECD/WB Initiative

Economics of Trade Finance

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Oscillations and Amplifications in Demand-Supply Network Chains

Contagion in Financial (Balance sheets) Networks


Key Sources of Research:



Nobuhiro Kiyotaki
London School of Economics

John Moore
Edinburgh University and London School of Economics

27 November 2001

Click to access kimo.pdf



Credit Cycles

Nobuhiro Kiyotaki; John Moore

The Journal of Political Economy, Vol. 105, No. 2.

(Apr., 1997),

Click to access km.pdf


Credit chains

Nobuhiro Kiyotaki (Princeton University)

John Moore (University of Edinburgh)

Date January 1997

Click to access id118_esedps.pdf

Click to access Kiyotaki_CreditChains.pdf



Credit and Business Cycles

N Kiyotaki


Click to access Credit-and-BusinessCycles.pdf



Inter-Enterprise Credit and Adjustment  During Financial Crises: The Role of Firm Size

Fabrizio Coricelli

Marco Frigerio

July, 2 2016

Click to access Coricelli%2C%20Fabrizio%20paper.pdf



Credit chains and bankruptcy propagation in production networks

Stefano Battiston, Domenico Delli Gatti, Mauro Gallegati,
Bruce Greenwald, Joseph E. Stiglitz


Click to access 2007_Credit_Chains.pdf



Trade Finance in Crisis : Market Adjustment or Market Failure ?

Jean-Pierre Chauffour

Thomas Farole

Date Written: July 1, 2009

Resaleable debt and systemic risk

Jason Roderick Donaldson , Eva Micheler


Click to access Donaldson-Micheler-Resaleable_Debt.pdf


Supply chains and credit-market shocks: Some implications for emerging markets,

Jinjarak, Yothin (2013)

ADBI Working Paper Series, No. 443

Click to access 770887406.pdf



Financial Amplification Mechanisms and the Federal Reserve’s Supply of Liquidity during the Crisis

Asani Sarkar
Jeffrey Shrader

Staff Report no. 431
February 2010

Click to access sr431.pdf



Aggregate Fluctuations and the Role of Trade Credit

Lin Shao


Click to access swp2017-37.pdf



Supply Chain Disruptions and Trade Credit

LU Yi OGURA Yoshiaki

TODO Yasuyuki ZHU Lianming


Click to access 17e054.pdf



Credit Shocks and Aggregate Fluctuations in  an Economy with Production Heterogeneity

Aubhik Khan

Julia K. Thomas

September 2013

Click to access KhanThomasDCTsept2013.pdf



Financial Frictions in Production Networks

Saki Bigio

Jennifer La’O

February 7, 2013

Click to access FinancialFrictionsNetworks.pdf


Working Paper No. 67, April 2016

Click to access WP-67.pdf



The Origins of Aggregate Fluctuations in a Credit Network Economy

Levent Altinoglu

October 16, 2016

Click to access Altinoglu_JMP_CurrentVersion.pdf

September 30, 2015

Click to access fcb800d01a5b8dce9ed13a4a200bf51f6fed.pdf


Consolidated Bibliography


Click to access aid4tradesupplychain13_biblio_e.pdf



Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms

Shaowen Luo

December 4, 2015

Click to access Luo.pdf


FDI, Trade Credit, and Transmission of Global Liquidity Shocks:
Evidence from Chinese Manufacturing Firms

Shu Lin and Haichun Ye

Click to access Lin–Ye_paper.pdf



Trade Credit, Financing Structure and Growth

Junjie Xia

October 27, 2016

Click to access jmp_oct16.pdf


The impact of corporate distress along the supply chain: evidences from United

Lucia Gibilaro

Gianluca Mattarocci

Click to access EFMA2017_0526_fullpaper.pdf



Does credit crunch investments down?
New evidence on the real eects of the bank-lending channel

Federico Cinganoz Francesco Manaresix Enrico Settex

December 2013

Click to access Credit_crunch_investments.pdf


Interwoven Lending, Uncertainty, and Liquidity Hoarding

Adam Zawadowski

December 13, 2017

Click to access credit.pdf



Trade credit: Elusive insurance of rm growth


October 5, 2016

Click to access Trade%20credit%20Elusive%20insurance%20of%20firm%20growth%202016.pdf



Chain Reactions, Trade Credit and the Business Cycle

Miguel Cardoso-Lecourtois

Click to access up.4593.1075462930.pdf


From production networks to geographical economics.

Gérard Weisbuch, Stefano Battiston.

Journal ofEconomic Behavior and Organization, Elsevier, 2007, 64 (3- 4), pp.448



Production networks and failure avalanches

Gerard Weisbuch
Stefano Battiston

March 5, 2018

Click to access 0507101.pdf



Self-organised patterns in production networks

Gerard Weisbuch

October 10, 2005

Click to access gwcomplexus.pdf



Networks : Propagation of Shocks over Economic Networks

Daron Acemoglu

July 22, 2014.



Debt-Rank Analysis of Financial Distress Propagation on a Production Network in Japan

University of Hyogo
TERAI Masaaki
Turnstone Research Institute, Inc.
SOUMA Wataru
Nihon University

Click to access 16e046.pdf



Operational causes of bankruptcy propagation in supply chain

Zhongsheng Hua ⁎, Yanhong Sun 1, Xiaoyan Xu


Click to access 48280.pdf



Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms

Shaowen Luo
September 20, 2015

Click to access 10-02-15Luo.pdf



From Micro to Macro via Production Networks

Vasco M. Carvalho

Click to access carvalho_from_micro.pdf



Trade Credit and the  Propagation of Corporate Failure: An Empirical

Tor Jacobson and Erik von Schedvin
August 2012

Click to access 723939764.pdf



Anna M. Costello

August 8, 2017

Click to access costello-anna-acctgcamp2017_0.pdf


Modeling defaults of companies in multi-stage supply chain networks

Kamil J.Mizgier, StephanM.Wagner,, JanuszA.Holyst


Click to access Mizgier_etal_InPress_Modeling_defaults_of.pdf




The origins of scale-free production networks

Stanislao Gualdizand Antoine Mandelx

June 28, 2015

Click to access Gualdi.pdf



Optimization of order policies in supply networks

S. GÄottlich¤ M. Hertyy C. Ringhoferz

August 18, 2008

Click to access FRG-2008-Ringhofer-Christian.FRG_Ringhofer_Orders080814.pdf


Financial Instability after Minsky: Heterogeneity, Agent Based Models and Credit

Domenico Delli Gatti

April 10, 2012

Click to access delli-gatti-domenico-berlin-paper.pdf


Measuring the Systemic Risk in Inter firm Transaction Networks

Makoto Hazama
Iichiro Uesugi

Click to access wp066.pdf


Systemic Risk Assessment in Complex Supply Networks

Anna Ledwoch, Alexandra Brintrup, J¨orn Mehnen, Ashutosh Tiwari

Click to access Ledwoch_etal_SJ_2016_Systemic_risk_assessment_in_complex_supply_networks.pdf



Reint Gropp
Frédéric Boissay


Click to access ecbwp753.pdf


The future of agent-based modelling.

Matteo Richiardi

Institute for New Economic Thinking and Nuffield College, Oxford, United Kingdom
Collegio Carlo Alberto, Moncalieri, Italy

This draft: June 2015

Click to access abmfuture-v12.pdf



Financially Constrained Fluctuations in an Evolving Network Economy

Domenico Delli Gatti
Mauro Gallegati
Bruce Greenwald
Alberto Russo
Joseph E. Stiglitz

Click to access DelliGatti%28presentation%29_ABM.pdf



Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks?

Claudio Raddatz

The World Bank
March, 2007

Click to access Credit_chains_051707_withtables.pdf



Linkages and spillovers in global production networks: firm-level analysis of the Czech automotive industry

Petr Pavlinek

Pavla Žížalová


Ontology of Bankruptcy Diffusion through Trade Credit

Lin Cheng

Huaiqing Wang

Huaping Chen

Click to access JRPIT44.4.401.pdf



Simone Gottlich, Michael Herty, and Christian Ringhofer

Click to access SpringerOpt10.pdf


Profitability, Trade Credit and Institutional Structure of Production

Michael Gofman
December 9, 2013

Click to access Supplier-Customer%20Network.pdf


The Economics of Information and Financial

Stefano Battiston
July 22, 2016

Click to access battiston2016information.pdf


Supply Chain Perspectives and Issues: A Literature Review

Albert Park
Gaurav Nayyar
Patrick Low

Click to access supply-chain-perspectives-and-issues.pdf




Stefano Battiston
Domenico Delli Gatti
Mauro Gallegati
Bruce C. Greenwald
Joseph E. Stiglitz

Click to access w15611.pdf



Inter-Firm Trade Finance in Times of Crisis

Anna Maria C. Menichini

Click to access WPS5112.pdf



Reducing the Probability of Bankruptcy Through Supply Chain Coordination

Xiaoyan Xu, Yanhong Sun, and Zhongsheng Hua


Click to access 573eac9d08ae298602e6e77a.pdf



Pathways towards instability in financial networks

Marco Bardoscia, Stefano Battiston Fabio Caccioli & Guido Caldarelli


Click to access bardoscia2017pathways-1.pdf



International Credit Supply Shocks

Ambrogio Cesa-Bianchiy Andrea Ferreroz Alessandro Rebuccix

June 16, 2017


Risk Propagation through Payment Distortion in Supply Chains

Alejandro Serrano

Rogelio Oliva

Santiago Kraiselburd

Click to access 0e6d7dc9d4b4f6bcada884b71562791404ed.pdf



Payment Defaults and Interfirm Liquidity Provision




November 2000

Click to access ecbwp0035.pdf



Risk Propagation in Supply Chains

Alejandro Serrano

Rogelio Oliva

Santiago Kraiselburd

Click to access f3278ab2a75ff11b0142fba19a4cf223805a.pdf



How Inventory Is (Should Be) Financed: Trade Credit in Supply Chains with Demand
Uncertainty and Costs of Financial Distress

Song (Alex) Yang, John R. Birge

Click to access YangBirge_trade%20credit.pdf



The Supply Chain Effects of Bankruptcy

S. Alex Yang

John R. Birge, Rodney P. Parker

Click to access 86a8667f24af2c6a5cd7eb52bbd12b39697b.pdf


Supply Chain Management: Supplier Financing Schemes and Inventory Strategies

Min Wang

Click to access Min_Wang_Dissertation.pdf


Foreign Investment and Supply Chains in Emerging Markets: Recurring Problems and Demonstrated Solutions

Theodore H. Moran



Click to access wp14-12.pdf


Improving cash flow using credit management
The outline case

Click to access cid_improving_cashflow_using_credit_mgm_Apr09.pdf.pdf




by Frederic Boissay

Click to access ecbwp573.pdf


Exposure to international crises: trade vs. financial contagion

Everett Grant




Credit Contagion and Trade Credit Supply:
Evidence from Small Business Data in Japan


Click to access 07e043.pdf



The Price of Complexity in Financial Networks

Joseph Stiglitz


Click to access The%20Price%20of%20Complexity%20in%20Financial%20Networks.pdf



The Price of Complexity in Financial Networks

S. Battiston


Click to access 160913_slides_battison.pdf




Author: Mayank Chaturvedi

You can contact me using this email mchatur at the rate of AOL.COM. My professional profile is on

3 thoughts on “Credit Chains and Production Networks”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s