Keywords

trade credit, clearinghouse, default, real effects, liquidity, coordination

We study the economic effects of a clearinghouse that allows a large network of firms to reduce their trade credit exposures and thus potentially lower the risk stemming from interfirm financial linkages. The clearinghouse reduced the gross debt by a sizable 8% of GDP in Republika Srpska, one of the two entities that form Bosnia and Herzegovina. Exploiting unique data on the debt network and the clearinghouse algorithm, we identify plausibly exogenous variation in clearing for a particular firm that derives from changes in debts far away in the network. We find that clearing reduces the probability of default, especially for financially distressed and cash poor firms. Consistent with reductions in firm risk, clearing increases sales, while it increases investment only for cash rich firms. We argue that the clearinghouse is an exchange technology that alleviates the lack of appropriate financial contracts. Furthermore, we provide evidence that the clearinghouse solves a coordination failure arising in a complex network of debts.