Profitability, Trade Credit and Institutional Structure of Production

I use a novel database to construct structure of supply chains for 990 firms operating in five sectors of the US economy and present a methodology to measure the vertical position of each firm in the supply chain. I find that firms further up from the producers of final goods have on average larger net receivables and profits relative to their cost of production. In addition, the difference in incentive levels between a pair of firms is positively related to their relative position in the supply chain. These results are consistent with the recursive moral hazard theory of trade credit by Kim and Shin (2011). The results also suggest that to understand financial contracting between firms we need to extend the bilateral analysis to an analysis of the entire production chains.