The Impact of Working Capital Financing Costs on the Efficiency of Trade Credit

Forthcoming in Production and Operations Management

28 Pages Posted: 17 May 2014 Last revised: 13 Feb 2019

See all articles by Sripad K. Devalkar

Sripad K. Devalkar

Indian School of Business

Harish Krishnan

University of British Columbia (UBC) - Sauder School of Business

Date Written: September 18, 2018

Abstract

We consider how trade credit can coordinate a two-echelon supply chain in the presence of supplier moral hazard and costly working capital financing. While trade credit resolves moral hazard problems in the absence of working capital financing costs, we show that this is not necessarily true when financial frictions make financing trade credit costly. We then show that trade credit along with an appropriately designed reverse factoring program can restore supply chain efficiency.

Keywords: Supply chain finance, Trade credit, Moral hazard, supply chain coordination

Suggested Citation

Devalkar, Sripad K. and Krishnan, Harish, The Impact of Working Capital Financing Costs on the Efficiency of Trade Credit (September 18, 2018). Forthcoming in Production and Operations Management. Available at SSRN: https://ssrn.com/abstract=2437739 or http://dx.doi.org/10.2139/ssrn.2437739

Sripad K. Devalkar (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Harish Krishnan

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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