S. Alex Yang

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms’ operations decisions, financial constraints, and multiple financing channels (bank loans and trade credit), this paper attempts to better understand the risk-sharing role of trade credit—that is, how trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a disadvantageous position in managing default relative to a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer’s financial status is relatively strong. Accordingly, trade credit is the only external source that the retailer uses to finance inventory. By contrast, if the retailer’s cash level is low, the supplier ...

Trade Credit in Supply Chains: Multiple Creditors and Priority Rules

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.

Sourcing from Suppliers with Financial Constraints and Performance Risk

Two innovative financing schemes have emerged in recent years to enable suppliers to obtain financing for production. The first, purchase order financing (POF), allows financial institutions to offer loans to suppliers by considering the value of purchase orders issued by reputable buyers. Under the second, which we call buyer direct financing (BDF), manufacturers issue both sourcing contracts and loans directly to suppliers. Both schemes are closely related to the supplier’s performance risk (whether the supplier can deliver the order successfully), upon which the repayment of these loans hinges. To understand the relative efficiency of the two emerging schemes, we analyze a game-theoretical model that captures the interactions among three parties (a manufacturer, a financially constrained supplier who can exert unobservable effort to improve delivery reliability, and a bank). We find that, when the manufacturer and the bank have symmetric information, POF and BDF yield the same payoffs for all parties i...

Trade Credit in Competition: A Horizontal Benefit

Trade credit is a widely adopted industry practice. Prior research has focused on how trade credit benefits firms by improving vertical supply chain relationships. This paper offers a novel perspective by examining whether trade credit benefits suppliers through a horizontal channel. Under the classic Bertrand competition framework, we analyze two competing firms’ price decisions with and without trade credit. We find that when the firms are financially constrained, trade credit softens horizontal price competition. Specifically, with trade credit, the firms will behave less aggressively in setting their prices for fear of incurring additional financing costs, resulting in equilibrium prices above the marginal cost, even if the products are perfect substitutes. Equilibrium profits under trade credit may thus be strictly higher than those under cash contracts. Furthermore, we find that with trade credit, a financially stronger firm may be able to exclude its weaker competitor from the market. We also inves...

Trade Credit and Supplier Competition

This paper examines how competition among suppliers affects their willingness to provide trade credit financing. Trade credit extended by a supplier to a cash constrained retailer allows the latter to increase cash purchases from its other suppliers, leading to a free rider problem. A supplier that represents a smaller share of the retailers purchases internalizes a smaller part of the benefit from increased spending by the retailer and, as a result, extends less trade credit relative to its sales. In consequence, retailers with dispersed suppliers obtain less trade credit than those whose suppliers are more concentrated. The free rider problem is especially detrimental to a trade creditor when the free-riding suppliers are its product market competitors, leading to a negative relation between product substitutability among suppliers to a given retailer and trade credit that the former provide to the latter. We test the model using both simulated and real data. The estimated relations are consistent with the models predictions and are statistically and economically significant.

Online Appendix to Cancelability in Trade Credit Insurance

This is the online appendix to Calculability in Trade Credit Insurance.Full paper available at: http://ssrn.com/abstract=2735907.