Supplier credits, limited liquidity, and timely demand information (Q538480)

The paper deals with the supplier-credit contracting between a manufacturer and a liquidity-constrained dealer. More specifically, it studies a manufacturer who must design a supply-chain contract with a liquidity-constrained dealer. The manufacturer's task is to determine the conditions of a supplier credit. The research interest in this is to find the conditions under which a dealer's limited liquidity has a significant influence on the shape of the optimal contract, especially on the emergence of quantity assignments that do not respond to the dealer's information about demand. The paper identifies the timeliness of the dealer's access to information about demand as a key driver. In the presented model, a liquidity-constrained dealer knows whether he is able to timely update his knowledge about demand in the upcoming period before contracting with a manufacturer. The manufacturer on the other hand faces the problem that he does not know whether he faces an informed dealer and, if informed, what the information is. The analysis in the paper starts with benchmark cases where each of the dealer's protections at the contracting stage, limited liquidity and private demand information, is studied independently. Then the case where the dealer faces a liquidity constraint right from the outset is considered. Finally, the optimal supply-credit contract if the dealer's liquidity gradually improves is studied. The major results of the whole study centre around the emergence of bunching if there are liquidity constraints and/or ignorance. Therefore, the authors of the paper also look at the robustness of their results and they show that the curvature of the inverse hazard rate, hence the manufacturer's incentive cost, is crucial for bunching and screening patterns.