Trade credit contracts: Design and regulation

Florina Silaghi () and Franck Moraux ()
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Florina Silaghi: UAB - Universitat Autònoma de Barcelona = Autonomous University of Barcelona = Universidad Autónoma de Barcelona

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Abstract: This paper provides a theoretical analysis of trade credit within a real options framework. We show that under trade credit the buyer delays the decision to stop production, getting closer to the supply chain optimal stopping decision. Therefore, trade credit may serve as a coordination device. The supplier can optimally choose to offer trade credit for free, since this will guarantee her business for a longer period of time. Optimal trade credit design is analyzed for an integrated supply chain (cooperative solution) and for external procurement (Nash bargaining and Stackelberg solutions). When regulation imposes a limit on trade credit maturity, the wholesale price is reduced, trade credit decreases and internal procurement increases. The model's predictions are in line with recent empirical evidence on the effects of regulation in the retail industry.

Keywords: Finance; Real options; Supply chain coordination; Trade credit; Vertical integration (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ban and nep-gth
Note: View the original document on HAL open archive server: https://hal.science/hal-03268865
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Citations: View citations in EconPapers (4)

Published in European Journal of Operational Research, 2022, 296 (3), pp.980-992. ⟨10.1016/j.ejor.2021.04.036⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03268865

DOI: 10.1016/j.ejor.2021.04.036

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