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
Date Written: September 18, 2018
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
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