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Trade credit contracts: Design and regulation

Florina Silaghi and Franck Moraux ()

European Journal of Operational Research, 2022, vol. 296, issue 3, 980-992

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; Trade credit; Vertical integration; Supply chain coordination; Real options (search for similar items in EconPapers)
JEL-codes: G13 G30 G31 G32 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.ejor.2021.04.036

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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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