The cash-in-advance constraint, also known as the Clower constraint after American economist Robert W. Clower, is an idea used in

economic theory Economics () is a behavioral science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

to capture monetary phenomena. In the most basic

economic model An economic model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed ...

s (such as the Walras model or the

Arrow–Debreu model In mathematical economics, the Arrow–Debreu model is a theoretical general equilibrium model. It posits that under certain economic assumptions (convex preferences, perfect competition, and demand independence), there must be a set of prices su ...

) there is no role for money, as these models are not sufficiently detailed to consider how people pay for goods, other than to say everyone has a budget constraint. To be able to say anything about the

money supply In macroeconomics, money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation (i ...

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...

and so on, economists must therefore introduce additional assumptions into their models. One possibility, and the more popular one, is to introduce a cash-in-advance constraint i.e. a requirement that each consumer or firm must have sufficient cash available before they can buy goods. An alternative assumption would be a 'Money-in-the-Utility-Function' assumption pioneered by Miguel Sidrauski, which states that people have a tendency to hold a certain amount of cash because they derive utility from holding it. Without these (or similar) assumptions economic theory would find it difficult to explain why people carry around a good (money) which takes up space in their wallet, can't be consumed and does not earn any interest.

Terms

''Cash in advance'' is a term describing terms of purchase, when full payment for a good or service is due before the merchandise is shipped. This presents the least risk to a seller while having the most risk to the buyer. It is often combined with other terms such as

Free On Board FOB (free on board) is a term in international commercial law specifying at what point respective obligations, costs, and risk involved in the delivery of goods shift from the seller to the buyer under the Incoterms standard published by the Inte ...

, which require the buyer to take possession of the merchandise as soon as it is loaded onto transportation, meaning the buyer assumes the

financial risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financi ...

if the shipment is lost or damaged en route. In actual daily business these sorts of terms are extremely rare unless the goods or services are of phenomenal value and high fragility. A ''constraint'' is any operating condition that puts a limit on the ability of a business to conduct its operations.

Examples

A company with $5000 on hand and incomes of $3000 a month has a constraint of $8000. That means, if the terms of an economic exchange (buying equipment, etc.) require terms that are cash-in-advance, then the limit that the company can actually obtain is $8000.

Uses

It is mostly used in a theoretical sense, to provide proofs of economic efficiencies, since it does not (by definition) involve terms of

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

. In these modeling theories, CIAC tends to show that up-front restrictions artificially limit the ability of companies to maintain positive inventory levels while reducing capital investment. They also inhibit real wealth in terms of cash on hand while elevating the likelihood of using junk bonds as instruments of solvency, a dangerous premise.

References

{{reflist Monetary economics