Payment-Chain Crises

Abstract

This paper introduces an endogenous network of payment chains into a business cycle model. Motivated by evidence of linked payments across firms in Costa Rica, we develop a framework where production orders form bilateral relations: some payments are executed immediately, while others—chained payments—are delayed until upstream payments are received. These chains capture real-world situations in which firms must wait to be paid before paying their own suppliers, leaving resources temporarily idle even when demand and capacity exist. In equilibrium, agents choose the amount of chained payments given interest rates and access to internal funds or credit lines. This choice determines the payment-chain network and aggregate total-factor productivity (TFP). The paper characterizes equilibrium dynamics and pecuniary externalities when agents internalize their own payment delays but not the delays imposed on others.