Financing production with liquidity constraints: the role of trade credit in agro-food supply chains

This paper focuses on the role of trade credit in agri-food supply chains, with particular reference to a context of financial turmoil and credit rationing. Trade credit enhances the resilience of firms to liquidity shocks and creates systemic risk. These features of trade credit are investigated with the aim of pinning down their effects on the financing of working capital investments of liquidity-constrained firms. To this end, we put forward a simple model of trade credit connections in supply chains and use such a model to measure the degree of exposure of these investment decisions to unexpected liquidity constraints arising from liquidity risk and systemic risk. We do so by characterising the impact of an exogenous liquidity shock on the investment and output of firms in agri-food supply chains, in terms of threshold values of such a shock.