Trade Credit Networks and systemic risk

Authors: Stefano Battiston, Domenico Delli Gatti and Mauro Gallegati

Understanding Complex Systems (2008)

Abstract

In this chapter, we present a model recently introduced in [14, 16] and we discuss the features of a networked economy in which N firms are organised in M production levels. Each firm at a certain level is supplied by a subset of firms in the upper level (suppliers) and supplies a subset of the firms in the lower level (customers). The bottom level consists of retailers, i.e., firms that sell in the consumer market. The top level consists of firms that provide primary goods to the other firms. Firms are connected by means of two mech-anisms: (i) the output of supplier firms is an input for customer firms; (ii) supplier firms extend trade credit to customers (as it is typically the case in reality). However, in the model, the trade credit contract is only implicitly sketched: we neither design the optimal trade credit scheme nor look for the optimal amount of trade credit a customer firm should require. Instead, we focus on the mechanisms of propagation of bankruptcy .