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The Impact of Working Capital Financing Costs on the Efficiency of Trade Credit
Author(s) -
Devalkar Sripad K.,
Krishnan Harish
Publication year - 2019
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12954
Subject(s) - trade credit , factoring , moral hazard , finance , capital (architecture) , business , working capital , economics , microeconomics , incentive , archaeology , history
We consider how trade credit can coordinate a two‐echelon supply chain in the presence of supplier moral hazard and costly working capital financing. While trade credit resolves moral hazard problems in the absence of working capital financing costs, we show that this is not necessarily true when financial frictions make financing trade credit costly. We then show that trade credit along with an appropriately designed reverse factoring program can restore supply chain efficiency.