Order-Based Trade Credits and Operational Performance in the Nanostore Retail Channel

Millions of nanostores sell basic items to bottom of the pyramid consumers in emerging markets. However, their suppliers struggle with high operational costs as a result of shopkeepers’ cash constraints. In this setting, we empirically investigate whether order-based trade credits can help improve operational performance in the nanostore supply chain. On the one hand, these credits can create efficiency gains in selling and distributing products to the nanostores. On the other hand, they are a risky endeavor, as shopkeepers might default on their credit lines. Using a difference-in-differences approach with nearest neighbor matching, we find that trade credits lead to substantial efficiency gains in the supply chain, while resolving important operational challenges for the supplier. We further investigate under which circumstances suppliers stand to gain from extending trade credits.