Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships

Previous work has claimed that monopoly power facilitates the provision of credit, because monopolists are better able to enforce payment. Here, we argue that if relationship-specific investments are required by borrowers to establish creditworthiness, monopoly power may reduce credit provision because holdup problems ex post will deter borrowers from investing in establishing creditworthiness. Empirically, we examine the relationship between monopoly power and credit provision, using data on the supply relationships of firms in five African countries. Consistent with the up-front investment story, we find that monopoly power is negatively associated with credit provision, and that this correlation is stronger in older supplier relationships. Because the data include several observations per firm, we are able to utilize firm fixed effects, thus netting out unobserved firm characteristics that may have been driving results in earlier studies. 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.