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

Production and Operations Management · 2019 · Volume 28 · Issue 4

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

trade credit, moral hazard, supply chain finance, reverse factoring

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