The Exploitation of Relationships in Financial Distress: The Case of Trade Credit


  • Benjamin S. Wilner

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    • LECG/Navigant Consulting, Evanston, Illinois. This article is taken from Chapter 2 of my dissertation completed at Northwestern University. I thank Susan Chaplinsky, Peter DeMarzo, Patrick W. Duthie, Michael Fishman, Thomas George, Mort Kamien, Mitchell Petersen, Oliver Richard, and Andy Winton as well as seminar participants at Concordia University, Dartmouth College, the Federal Reserve Bank of Chicago, the Federal Reserve Bank of Philadelphia, the Federal Reserve Board, the University of Iowa, the London Business School, the Norwegian School of Management, Northwestern University, and Notre Dame for valuable comments. I also thank René Stulz (the editor) and an anonymous referee for their thoughtful suggestions. All mistakes are due to the author.


This paper develops optimal pricing, lending, and renegotiation strategies for companies in relationships where one firm is highly dependent on the other. Long-term trade—creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors. Anticipating these larger renegotiation concessions, not only do less financially stable firms prefer trade credit, but all firms agree to pay a higher interest rate for trade credit. The model also explains the existence of “teaser” interest rates and convenience classes. Findings are consistent with those of the relationship-lending literature.