https://macropaperwarehouse.com/authors/santiago-justel/Santiago JustelHugo -- gohugo.ioen-usThu, 01 Jan 2026 00:00:00 +0000https://macropaperwarehouse.com/papers/diversion-risk-markups-and-the-financing-cost-advantage-of-trade-credit/Thu, 01 Jan 2026 00:00:00 +0000https://macropaperwarehouse.com/papers/diversion-risk-markups-and-the-financing-cost-advantage-of-trade-credit/<p>This paper provides a theory and evidence for why firms with higher markups extend more trade credit, focusing on a financing cost channel that is distinct from existing competition-based explanations. In the model, diversion risk creates a wedge between the bank borrowing rate and the deposit rate. Under cash in advance, the buyer must borrow the full invoice amount (production cost times markup); under trade credit, the seller instead borrows only her production costs. Since higher markups amplify the difference in borrowing needs between these two payment forms, they make trade credit more attractive—and this advantage strengthens with the buyer&rsquo;s borrowing rate, generating a unique interaction prediction. Empirical tests using detailed Chilean export transactions matched with firm-product markup estimates (De Loecker et al. 2016 methodology) find that a one standard deviation rise in upstream markups increases trade credit by 13 days, with the extensive and intensive margins contributing roughly equally; this effect strengthens with the destination country&rsquo;s borrowing costs. Results are robust to instrumenting markups with plant-product level physical productivity and replicate in U.S. Compustat data with the real Effective Fed Funds Rate as the borrowing cost proxy.</p>