A Theory of Payments-Chain Crises
This paper introduces an endogenous network of payments chains into a business cycle model. Agents order production in bilateral relations. Some payments are executed immediately. Other payments, chained payments, are delayed until other payments are executed. Because production starts only after orders are paid, chained payments induce production delays. In equilibrium, agents choose the amount of chained payments given interest rates and access to internal funds or credit lines. This choice determines the payments-chain network and aggregate total-factor productivity (TFP). The paper characterizes equilibrium dynamics and their innate inefficiencies. Agents internalize the direct costs of their payment delays, but do not internalize the costs induced onto others. This externality produces novel policy insights and rationalizes permanent reductions in TFP under excessive debt.
I would like to thank Luigi Bocola, Ricardo Lagos, Jennifer La'O, Ezra Oberfeldt, Michael Peters, Guillaume Rocheteau, Gary Richardson, Pierre-Olivier Weill, and Yuliy Sannikov as well as seminar participants at UC Irvine, UCLA, CEMLA, CESifo, for early discussions. Sebastian Merkel provided a thoughtful discussion. Finally, I am in debt with Ken Miyahara and Luis Y�pez for their outstanding assistance, multiple discussions, and their creativity in tackling proofs. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.