Effects of demand uncertainty reduction on the selection of financing approach in a capital-constrained supply chain

This study investigates how demand uncertainty reduction (DUR) affects the decisional dynamics within a supply chain, which comprises a supplier and a capital-constrained retailer, who chooses between bank credit and trade credit financing. A comprehensive scenario analysis suggests the retailer should accept trade credit when DUR is high, trade credit risk premium is moderate, and wholesale price is exogenous and low. However, the retailer should adopt trade credit only when both DUR and production cost are not high, and wholesale price is set endogenously. We further relax the assumption on the bank's risk attitude and find most results still hold.

Automated summary

This study suggests that retailers should accept trade credit when demand uncertainty is high, trade credit risk premium is moderate, and wholesale price is low. Retailers should only adopt trade credit when both demand uncertainty and production cost are not high, and wholesale price is endogenously determined. Research also finds that most results still hold when relaxing the assumption on the bank's risk attitude.