The role of institutions in supporting SME financing through the trade credit channel: an empirical analysis of Italian provinces

Trade credit is a relevant channel through which institutional development affects the real economy. When contract enforcement is weak and trust is low, firms engage in opportunistic behavior that is likely to disproportionally penalize small firms, characterized by weak bargaining power with respect to their larger customers or suppliers. This mechanism is particularly relevant during periods of sharp tightening of credit conditions from banks. Exploiting regional variation in Italy, the paper finds that institutional development mitigated the impact of the financial crisis, particularly for smaller firms, by limiting the adverse effects of the trade credit channel on their liquidity conditions.