a model of trade credit in a capital constrained distribution channel abstract in a product market with uncertain demand we examine a distribution channel consisting of one manufacturer and one capital constrained retailer the retailer may fund its business by borrowing credit either from a competitive bank market or from the manufacturer provided it is also to the latter s benefit to extend trade credit under bank credit financing we show that the channel behaves as if the retailer is not constrained by capital in a wholesale price contract we find that trade credit makes both channel members better off and is the unique financing equilibrium trade credit better integrates the channel than bank credit by centralizing the financing of distribution at the manufacturer we further compare bank versus trade credit under a classical channel contract revenue sharing contract in addition we present a set of numerical experiments to show how product cost internal capital and demand variability impact on the market equilibrium under both bank and trade credits

optimal pricing and return policies for perishable commodities this paper considers the pricing decision faced by a producer of a commodity with a short shelf or demand life a hierarchical model is developed and the results of the single period inventory model are used to examine possible pricing and return policies the paper shows that several such policies currently in effect are suboptimal these include those where the manufacturer offers retailers full credit for all unsold goods or where no returns of unsold goods are permitted the paper also demonstrates that a policy whereby a manufacturer offers retailers full credit for a partial return of goods may achieve channel coordination but that the optimal return allowance will be a function of retailer demand therefore such a policy cannot be optimal in a multi retailer environment it is proven however that a pricing and return policy in which a manufacturer offers retailers a partial credit for all unsold goods can achieve channel coordination in a multi retailer environment this article was originally published in marketing science volume 4 issue 2 pages 166 176 in 1985

new revelations about unemployment persistence in spain time series and panel data approaches using regional data this article aims to re examine the persistence of unemployment in spain for this purpose we use time series and cross section analysis from a time series viewpoint we disaggregate unemployment by regions and use unit root tests ar coefficients and fractional differencing parameters as indicators of persistence for the cross section approach we first estimate mean regressions of regional unemployment rates then using a panel of 114 periods and 50 provinces we estimate pooled fixed and random effects models finally following some recent developments we implement several panel data unit root tests previous studies had already shown the strong persistence of spanish unemployment our disaggregated analysis extends the finding to reveal that the persistence is greater in the most industrialized regions the results also suggest that a structural break took place in 1994 implying a decline in the unemployment persistence since then

product risk asymmetric information and trade credit the purpose of this paper is to explain cross sectional variations in trade credit terms across firms and industries this study shows that there is a separating equilibrium in which the size of the cash discount conveys information about product quality the driving forces of this equilibrium outcome are the risk sharing motives of the producer and buyer as well as asymmetric information about product quality the empirical implications of the model are derived and discussed in relation to industry practices

accounts receivable management policy theory and evidence this paper develops and tests hypotheses that explain the choice of accounts receivable management policies the tests focus on both cross sectional explanations of policy choice determinants as well as incentives to establish captives we find size concentration and credit standing of the firm s traded debt and commercial paper are each important in explaining the use of factoring accounts receivable secured debt captive finance subsidiaries and general corporate credit we also offer evidence that captive formation allows more flexible financial contracting however we find no evidence that captive formation expropriates bondholder wealth firms typically sell merchandise on credit rather than requiring immediate cash payment such credit sales generate accounts receivable although credit terms and credit collection procedures have been studied see smith 1980 there has been little systematic analysis of the organizational and financial structures employed to manage the firm s accounts receivable these decisions merit more careful attention for two reasons first receivables are a substantial fraction of corporate assets for example 1986 compustat data indicate that accounts receivable are 21 0 of u s manufacturing corporations total assets second we observe substantial diversity in firms use of specialized contracts and intermediaries in their accounts receivable management policies firms can 1 establish a captive finance subsidiary 2 issue accounts receivable secured debt 3 factor 4 employ a credit reporting firm 5 retain a credit collection agency or 6 purchase a credit insurance policy 1 in this paper we demonstrate that accounts receivable management policy offers opportunities for both the development of a robust theory as well as empirical testing of the theory s implications although the data necessary to

evidence on the determinants of credit terms used in interfirm trade trade credit is created whenever a supplier offers terms that allow the buyer to delay payment in this paper we document the rich variation in interfirm credit terms and credit policies across industries we examine empirically the firm s basic credit policy choices whether to extend credit or to require cash payment and if credit is extended whether to adopt simple net terms or terms with discounts for prompt payment we also examine determinants of variations in two part terms results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness trade credit has important economic significance from both micro and macroeconomic perspectives during the 1990s vendor financing has accounted for an average 1 5 trillion of the book value of all assets of u s corporations and has represented approximately 2 5 times the combined value of all new public debt and primary equity issues during a given year as a component of the money supply trade credit in the form of accounts payable exceeds the primary money supply mi by a factor of 1 5 on average 1 clearly efforts to control economic growth through monetary policy can be confounded by aggregate decisions of businesses to increase or decrease reliance on trade credit financing several recent empirical studies examine determinants of firm reliance on trade credit 2 these studies model supply and demand for trade credit using financial statement data accounts receivable and payable 3 however many aspects of trade credit practice are unexplored most notably little is known about the types of credit terms e g net 30 2 10 net 30 and credit policies that are observed across firms and industries the only comprehensive doc

trade credit and informational asymmetry commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held by offering trade credit a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short term financing the information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments traditional explanations for the widespread use of trade credit fall into two categories the financing motive holds that capital market imperfections enable sellers to finance buyer purchases at lower cost than financial institutions ferris 4 argues that trade credit provides payment flexibility and thus reduces the overall need for buyers and sellers to maintain precautionary balances emery 3 contends that noncompetitive rents of financial institutions can be circumvented by sellers and buyers through provision of trade credit however the financing motive is not sufficient to explain why small suppliers offer trade credit the wide cross sectional variation in terms or why large buyers often take the prompt payment discount late a second set of explanations is best described as pricing motivations for trade credit provision nadiri 10 argues that availability of alternative payment terms can increase product demand but does not indicate why the offered terms could not be duplicated by financial institutions schwartz and whitcomb 14 argue that trade credit is used to circumvent robinson patman and similar prohibitions on price discrimination the correctness of this position depends on the charge to users of trade credit exceeding the cost of provision by the seller although the explanation is possible in principle an empirical question remains as to why variations in actual credit terms appear to be based on product market rather than buyer characteristics the literature also contains analyses of the impact of changing macroeconomic conditions on trade credit terms and aggregate credit flows schwartz 13 for example employs a financing motive for trade credit to conclude that restrictive monetary policy can be partly mitigated by liberalization of trade credit terms by firms with relatively easy access to capital markets however a microeconomic

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

on the interaction of real and financial decisions of the firm under uncertainty this study analyzes the interaction between the optimal level of investment and debt financing for this purpose a model is structured in which a firm facing an uncertain price has to decide on its optimal level of investment and debt the amount of investment sets a limit on output whose optimal level is determined after price is realized the debt involved is risky there exists a possibility of bankruptcy the analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage we also demonstrate that as the tax rate increases optimal capacity decreases and optimal leverage increases an analysis of the impact of changes in the expected price shows that under some conditions an increase in expected price would lead to an increase in optimal investment firm size and a decrease in optimal debt

the effect of payment schemes on inventory decisions the role of mental accounting does the payment scheme have an effect on inventory decisions in the newsvendor problem keeping the net profit structure constant we examine three payment schemes that can be interpreted as the newsvendor s order being financed by the newsvendor herself scheme o by the supplier through delayed order payment scheme s and by the customer through advanced revenue scheme c in a laboratory study we find that inventory quantities exhibit a consistent decreasing pattern in the order of schemes o s and c with the order quantities of scheme s being close to the expected profit maximizing solution these observations are inconsistent with the expected profit maximizing model contradict what a regular or hyperbolic time discounting model would predict and cannot be explained by the loss aversion model instead they are consistent with a model that underweights the order time payments which can be explained by the prospective accounting theory in the mental accounting literature a second study shows that the results hold even if all physical payments are conducted at the same time suggesting that the framing of the payment scheme is sufficient to induce the prospective accounting behavior we further validate the robustness of our model under different profit conditions our findings contribute to the understanding of the psychological processes involved in newsvendor decisions and have implications for supply chain financing and contract design this paper was accepted by christian terwiesch operations management

a partial credit guarantee contract in a capital constrained supply chain financing equilibrium and coordinating strategy abstract in this study we first design a supply chain finance scf system comprising a capital constrained retailer a manufacturer and a commercial bank and formulate a bilevel stackelberg game model in which the bank acts as a leader second we design a partial credit guarantee pcg contract for scf incorporating the bank credit financing bcf and manufacturer s trade credit guarantee to analyze its equilibrium financing strategies third we explore the interdependencies between the operational and financial decisions and analyze the coordination conditions for the pcg contract fourth we perform a comparative analysis of the optimal strategies among the various financing scenarios including a traditional supply chain without capital constraint and scf without credit guarantee as well as one with full credit guarantee to examine the impact of the credit guarantee coefficient finally we perform a numerical sensitivity analysis in terms of the manufacturer s guarantee coefficient and the retailer s initial capital and verify the manufacturer s willingness to provide pcg for scf the findings of this study reveal that based on a suitable guarantee coefficient the pcg contract may realize profit maximization and channel coordination in the scf system as well as achieve the super coordination effect

improving channel coordination through franchising in this paper we explore the role of franchising arrangements in improving coordination between channel members in particular we focus on two elements of the franchising contract namely the royalty structure and the monitoring technology we begin with a simple analysis where a manufacturer distributes its product through a retailer and the retail demand is affected by the retail price and the service provided by the retailer in this context we show that neither royalty payments nor monitoring are needed for full coordination we then extend the model to allow for free riding by franchisees and show that although monitoring helps affect the behavior of the franchisees royalty payments are still unnecessary to coordinate the activities of the franchisor and the franchisees finally we show that in environments where factors affecting retail sales are controlled by both the franchisor and the franchisee royalty payments provide the necessary incentives for the franchisor while monitoring systems are used to ensure that franchisees also behave in the best interest of the channel our general results are found to be consistent with those in brickley and dark 1987 and norton 1988 who conclude that franchising is affected by principal agent problems our theory finds special support in the work of lafontaine 1988 where it is concluded that the incidence of franchising is related to cost of monitoring and the importance of franchisor investments

trade credit and credit rationing asymmetric information between banks and firms can preclude financing of valuable projects trade credit alleviates this problem by incorporating in the lending relation the private information held by suppliers about their customers incentive compatibility conditions prevent collusion between two of the agents e g the buyer and the seller against the third e g the bank consistent with the empirical findings of petersen and rajan 1995 firms without relationships with banks resort more to trade credit and sellers with greater ability to generate cash lows provide more trade credit finally small firms react to monetary contractions by using trade credit consistent with the empirical results of nilsen 1994 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

in kind finance a theory of trade credit it is typically less profitable for an opportunistic borrower to divert inputs than to divert cash therefore suppliers may lend more liberally than banks this simple argument is at the core of our contract theoretic model of trade credit in competitive markets the model implies that trade credit and bank credit can be either complements or substitutes among other things the model explains why trade credit has short maturity why trade credit is more prevalent in less developed credit markets and why accounts payable of large unrated firms are more countercyclical than those of small firms

equity estimation and assessing market response a rejoinder in a recent article wildt 1993 evaluates our previously proposed equity estimator krishnamurthi and rangaswamy 1987 based primarily on an analysis of the two variable case he concludes that there does not seem to be sufficient evidence to recommend the use of the equity estimation procedure for market response estimation p 450 we show that wildt s results are incomplete and his conclusions inaccurate using additional simulations conducted specifically for this study we show that under the conditions explored by wildt equity in fact performs substantially better than ordinary least squares ols we describe our results by focusing on the four variable case which provides a more comprehensive context for evaluating the estimators than the two variable case considered by wildt the two variable case imposes severe restrictions on the performance of biased estimators we proposed the equity estimator to provide market researchers with a method that in a single finite sample under conditions of multicollinearity will typically yield parameter estimates closer to the true parameters than the ols estimates because of the decision making context of marketing research we use mean squared error mse as the primary criterion to evaluate the estimators wildt emphasizes the values of average estimated coefficients when reporting his simulation results this provides a mis

financing equilibrium in a three echelon supply chain the impact of a limited bank loan this paper studies a three echelon supply chain consisting of a commercial bank a supplier and a capital constrained retailer the newsvendor like retailer may not borrow up to what she needs from

risk hedging in a supply chain option vs price discount abstract in this research two risk hedging strategies the option contract and the advance purchase discount contract are investigated within a manufacturer retailer two echelon supply chain context this study offers three contributions first the optimal decisions under the two contracts from the perspectives of both the manufacturer and the retailer are determined second circumstances under which supply chain coordination can be reached are identified third the scenario of loss averse manufacturer has been explored the results of the analysis provide practical insights to the manufacturer when she plans production quantity and to the retailer when he replenishes inventory

the effect of taxes and depreciation on corporate investment and financial leverage this paper provides an analysis of the effect of corporate and personal taxes on the firm s optimal investment and financing decisions under uncertainty it extends the deangelo aad masulis capital structure model by endogenizing the firm s investment decision the authors results indicate that when investment is allowed to adjust optimally the existing predictions about the relationship between investment related and debt related tax shields must be modified in particular the authors show that increases in investment related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level in cross sectional analysis firms with higher investment related tax shields normalized by expected earnings need not have lower debt related tax shields normalized by expected earnings unless all firms utilize the same production technology differences in production technologies across firms may thus explain why the empirical results of recent cross sectional studies have not conformed to the predictions of deangelo and masulis

comment managing channel profits comment in a recent paper in this journal jeuland and shugan jeuland a s shugan 1983 managing channel profits marketing sci 2 summer 239 272 proposed a quantity discount schedule as a way of coordinating a channel as they put it on p 253 of their paper a quantity discount schedule which would fix the retailer s and hence the manufacturer s profits to some fixed linear function of total channel profits would lead the channel to maximize profits the purpose of this note is to show that a quantity discount schedule is not necessary for channel coordination

an optimal financial response to variable demand this paper develops a positive theory of trade credit based on its use as a financial response to deterministic variations in demand the operating alternatives to trade credit which include the use of storage or additional capacity are modeled using results from the peak load pricing literature the paper shows that the extension of credit partitions the buyer s inventory cost and permits specialization at incurring the components of this cost this specialization is economical when the seller has an advantage at incurring the financial cost and does not have an advantage at incurring the operating cost of accommodating variable demand conditions that provide these necessary and sufficient cost relationships are described the paper also shows that a reduction in costs rather than an increase in revenues is the source of both the buyer s and seller s increase in wealth

note the role of returns policies in pricing and inventory decisions for catalogue goods manufacturers often use returns policies to encourage retailers to stock and price items more aggressively we focus on the effect that such policies have on both a retailer s and a manufacturer s profits when the retailer must commit prior to the selling season to both a stocking quantity and a price at which to sell an item such a commitment is often necessary for retailers who sell primarily through catalogues

stackelberg solution in a vendor buyer supply chain model with permissible delay in payments abstract in practice vendors or sellers often offer their buyers a fixed credit period to settle the account the benefits of trade credit are not only to attract new buyers but also to avoid lasting price competition on the other hand the policy of granting a permissible delay adds not only an additional cost but also an additional dimension of default risk to vendors in this paper we will incorporate the fact that granting a permissible delay has a positive impact on demand but negative impacts on both costs and default risks to establish vendor buyer supply chain models then we will derive the necessary and sufficient conditions to obtain the optimal solution for both the vendor and the buyer under non cooperative stackelberg equilibrium finally we will use two numerical examples to show that 1 granting a permissible delay may significantly improve profits for both the vendor and the buyer 2 the sensitivity analysis on the optimal solution with respect to each parameter and 3 the comparisons between nash and stackelberg solutions

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

mean variance analysis of option contracts in a two echelon supply chain abstract this paper studies the implications of risk considerations for option contracts in a two echelon supply chain under the mean variance framework we first investigate the conditions for coordinating the supply chain by using option contracts we find that supply chain coordination is not always achieved contrasting with the result that properly designed option contracts can always coordinate a supply chain in the absence of risk considerations second we analyze the stackelberg game for a decentralized supply chain in two cases depending on whether the retailer s risk aversion threshold is known to the supplier we show that when the threshold is public information there exists a unique equilibrium in which the supplier with a higher risk tolerance prefers to reduce the exercise price and thus the retailer s order quantity increases when the retailer s risk aversion threshold is private information the retailer has an incentive to pretend to be less risk averse to curb this incentive distortion we design a new minimum option quantity commitment for the supplier we complement our theoretical results with numerical simulations

the quantity flexibility contract and supplier customer incentives consider a supply chain consisting of two independent agents a supplier e g a manufacturer and its customer e g a retailer the latter in turn serving an uncertain market demand to reconcile manufacturing procurement time lags with a need for timely response to the market such supply chains often must commit resources to production quantities based on forecasted rather than realized demand the customer typically provides a planning forecast of its intended purchase which does not entail commitment benefiting from overproduction while not bearing the immediate costs the customer has incentive to initially overforecast before eventually purchasing a lesser quantity the supplier must in turn anticipate such behavior in its production quantity decision this individually rational behavior results in an inefficient supply chain this paper models the incentives of the two parties identifying causes of inefficiency and suggesting remedies particular attention is given to the quantity flexibility qf contract which couples the customer s commitment to purchase no less than a certain percentage below the forecast with the supplier s guarantee to deliver up to a certain percentage above under certain conditions this method can allocate the costs of market demand uncertainty so as to lead the individually motivated supplier and customer to the systemwide optimal outcome we characterize the implications of qf contracts for the behavior and performance of both parties and the supply chain as a whole

corporate trade credit and inventories new evidence of a trade off from accounts payable and receivable abstract trade credit is an important source of finance for firms and has been well researched but the focus has been on financial trade offs in this paper we consider the trade offs with inventories and develop a simple model that recognizes the incentives a firm faces to offer and receive trade credit our model identifies the response of accounts payable and accounts receivable to changes in the cost of inventories profitability risk and liquidity and importantly this influence operates through a production channel our results support the model and complement many existing studies focused on explaining the financial terms of trade credit

inventory management with asset based financing most of the traditional models in production and inventory control ignore the financial states of an organization and can lead to infeasible practices in real systems this paper is the first attempt to incorporate asset based financing into production decisions instead of setting a known exogenously determined budgetary constraint as most existing models suggest we model the available cash in each period as a function of assets and liabilities that may be updated periodically according to the dynamics of the production activities furthermore our models allow different interest rates on cash balance and outstanding loans which is an enhancement over most traditional models in that inventory financed by a loan may be more expensive than that by out of pocket cash we demonstrate the importance of joint consideration of production and financing decisions in a start up setting in which the ability to grow the firm is mainly constrained by its limited capital and dependence on bank financing we then explain the motivation for asset based financing by examining the decision making at a bank and a set of retailers in a newsvendor setting

channel coordination and quantity discounts this paper presents a model for analyzing the impact of joint decision policies on channel coordination in a system consisting of a supplier and a group of homogeneous buyers the joint decision policy characterized by the unit selling price and the order quantity is coordinated through quantity discounts and franchise fees both the annual demand rate and the operating cost including the purchase ordering and inventory holding costs depend on the joint decision policy employed this paper contributes by integrating work addressing quantity discounts on inventory and ordering policies and work focusing on the control mechanism provided by quantity discounts in channel coordination it is shown that the optimal all unit quantity discount policy is equivalent to the optimal incremental quantity discount policy in achieving channel coordination furthermore it is shown that quantity discounts alone are not sufficient to guarantee joint profit maximization the analyses of the general models are illustrated by specific analytical results obtained for a given demand function