Limited Liquidity, Supplier Credits, and Timely Demand Information

42 Pages Posted: 24 Apr 2007 Last revised: 17 Jun 2009

See all articles by Sabine Böckem

Sabine Böckem

University of Basel

Ulf Schiller

University of Basel

Date Written: April 1, 2007

Abstract

We consider supplier-credit contracting between a manufacturer and a liquidity-constrained dealer. We show that the timeliness according to which the dealer receives demand information has a significant impact on the optimal contract. If the manufacturer cannot be sure that a dealer without liquidity has demand information when the contract is written, the optimal contract pools an ignorant dealer with a dealer who knows that there are unfavorable demand conditions whereas dealers with favorable demand information are screened. If the dealer's liquidity rises, the manufacturer proposes a contract that resembles the solution of a classic adverse selection model in the spirit of Harris, Kriebel, and Raviv (1982). For high liquidity, the optimal supplier-credit contract pools an ignorant dealer with dealers who have favorable demand information whereas dealers with unfavorable demand information are screened.

Keywords: Supplier credit, supply chain contract, limited liquidity, ignorance

JEL Classification: D8, M1, M2

Suggested Citation

Böckem, Sabine and Schiller, Ulf, Limited Liquidity, Supplier Credits, and Timely Demand Information (April 1, 2007). Available at SSRN: https://ssrn.com/abstract=980648 or http://dx.doi.org/10.2139/ssrn.980648

Sabine Böckem

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Ulf Schiller (Contact Author)

University of Basel ( email )

Peter-Merian-Weg 6
Basel, 4002
Switzerland

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