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Trade Credit in Supply Chains: Multiple Creditors and Priority Rules

29 Pages Posted: 15 May 2011 Last revised: 10 Jun 2012

S. Alex Yang

London Business School

John R. Birge

University of Chicago - Booth School of Business

Date Written: February 19, 2011

Abstract

Priority rules determine the order of repayment when the debtor cannot repay all of his debt. In this paper, we study how different priority rules influence trade credit usage and supply chain efficiency when multiple creditors are present. We find that with only demand risk, when the wholesale price is exogenous, trade credit with high priority can lead to high chain efficiency, yet trade credit with low priority allows more retailers to obtain trade credit and suppliers to gain higher profits. When the supplier has control of the wholesale price, however, we show that the supplier should extend unlimited trade credit with net terms. We also study the case when demand risk mingles with other risks, especially those with longer terms. Under this setting, we show several scenarios when the optimal trade credit policy should change according to different risks and that, in general, trade credit with low priority results in high chain efficiency. Finally, we use empirical data to show that, at an aggregate level, trade credit usage reacts to changes in the law according to our theory.

Keywords: supply chain management, newsvendor model, trade credit, priority rules, bankruptcy, financial constraint

Suggested Citation

Yang, S. Alex and Birge, John R., Trade Credit in Supply Chains: Multiple Creditors and Priority Rules (February 19, 2011). Available at SSRN: https://ssrn.com/abstract=1840663 or http://dx.doi.org/10.2139/ssrn.1840663

S. Alex Yang (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/sayang/

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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