A Model of Supply Chain Finance

Bo Hu, Makoto Watanabe and Jun Zhang

No 10778, CESifo Working Paper Series from CESifo

Abstract: This article develops a model in which an intermediary uses a supply chain finance (SCF) program to fund suppliers. The SCF program pools liquidity from suppliers and meanwhile provides immediate payment to suppliers with pressing liquidity needs. We show that the intermediary optimally selects not only suppliers with positive profitability but also suppliers with negative profitability who, however, contribute to the liquidity pool. Inserting the model to an otherwise standard monetary framework, we show that with higher nominal interest rates, the SCF program emphasizes the liquidity contribution more and the profitability contribution less. Deviating from the Friedman rule, where only suppliers with positive profitability are selected, may lead to welfare gains.

Keywords: supply chain finance; liquidity pooling; liquidity cross-subsidization; money search; intermediary (search for similar items in EconPapers)
JEL-codes: E41 E42 E51 G23 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-dge
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Working Paper: A Model of Supply Chain Finance (2023)
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