The Credit Granting Decision

Harold Bierman, Jr. and Warren H. Hausman
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Harold Bierman, Jr.: Cornell University, Ithaca, New York
Warren H. Hausman: Cornell University, Ithaca, New York

Management Science, 1970, vol. 16, issue 8, B519-B532

Abstract: A series of probabilistic models are formulated for the credit granting policy of a firm. First, a single-period analysis is presented for the two-action problem, "give credit or do not give credit." Then a multi-period analysis for the same problem is presented, showing that the single-period analysis ignores important future benefits. The multi-period analysis contains a Bayesian approach to revisions of the probability of collection as collection experience is gained. The multi-period analysis is modified by adding discounting to reflect the time value of money and a probability that the customer will cease purchasing. Next, a dynamic programming formulation of the multi-period problem is presented, and this formulation is then adapted to include a decision on how much credit to offer. The paper closes with a series of remarks concerning the practical application of the analysis.

Date: 1970
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