Product Risk, Asymmetric Information, and Trade Credit

Lee, Yul W.; Stowe, John D.

doi:10.2307/2331291

Cited by 341 publications

(203 citation statements)

References 5 publications

(1 reference statement)

Supporting

Mentioning

183

Contrasting

Unclassified

Order By: Relevance

“…Trade credit is ubiquitous, especially in the current economy with banks still reluctant to lend. In our context, we build on the ideas articulated in Smith (1987), Long et al (1993), and Lee and Stowe (1993) that deferred contingent payments (via trade credit) allow the buyers to learn about suppliers' product quality and to withhold contingent payments in case the suppliers produced defective products. Lee and Stowe (1993) argue that deferred contingent payments (via trade credit) can be thought of as an implicit product warranty and a very strong form of warranty, because the buyer can return the product to the supplier and refuse to pay without having to prove that the product is of low quality.…”

Section: Introductionmentioning

confidence: 99%

Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms

Babich

Tang

2012

M&SOM

262

172

View full text Add to dashboard Cite

Recent cases of product adulteration by foreign suppliers have compelled many manufacturers to re-think approaches to deterring suppliers from cutting corners, especially when manufacturers cannot fully monitor and control the suppliers' actions. Recognizing that process certification programs, such as ISO9000, do not guarantee unadulterated products and that product liability and product warranty with foreign suppliers are rarely enforceable, manufacturers turn to mechanisms that make payments to the suppliers contingent on no defects discovery. In this paper we study: (a) the deferred payment mechanism -the buyer pays the supplier after the deferred payment period only if no adulteration has been discovered by the customers; (b) the inspection mechanism -the buyer pays the supplier is immediately, contingent on product passing the inspection; and (c) the combined mechanism -a combination of the deferred payment and inspection mechanisms. We find the optimal contracts for each mechanism, and describe the Nash equilibria of inspection sub-games for the inspection and the combined mechanisms. The inspection mechanism cannot completely deter the suppliers from product adulteration, while the deferred payment mechanism can. Surprisingly, the combined mechanism is redundant: either the inspection or the deferred payment mechanisms perform just as well. Finally, the four factors that determine the dominance of deferred payment mechanism over the inspection mechanism are: (a) the inspection cost relative to inspection accuracy, (b) the buyer's liability for adulterated products, (c) the difference in financing rates for the buyer and the supplier relative to the defects discovery rate by customers, and (d) the difference in production costs for adulterated and unadulterated product.

show abstract

Section: Introductionmentioning

confidence: 99%

Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms

Babich

Tang

2012

M&SOM

262

172

View full text Add to dashboard Cite

show abstract

“…Trade credit serves to differentiate competing offers as well as payment facilities which determine the choice of any smart consumer. Similarly, when demand is irregular, due to uncertainty or seasonal variations, the seller may temporarily relax the terms of credit standards to drive sales in periods of low demand (Emery, 1987;Lee and Stowe, 1993;Paul and Wilson, 2006). Trade credit can also be used to discriminate price (Schwartz and Whitcomb, 1979;Brennan et al, 1988;Miam and Smith, 1992;Petersen and Rajan, 1997).…”

Section: Non-financial Motivesmentioning

confidence: 99%

“…Trade credit is used as a means of avoiding such information asymmetries related to default risk of the buyer. Smith's model has largely inspired other researchers (Long et al, 1993;Lee and Stowe, 1993;Deloof and Jegers, 1996;Wei and Zee, 1997;Emery and Nayar, 1998;Pike et al, 2005;Pindado and Bastos, 2007). Informational asymmetry is not about the quality of the borrower but about the quality of the product sold by the supplier.…”

Section: Non-financial Motivesmentioning

confidence: 99%

The Determinants of Trade Credit Demand: An Empirical Study from Cameroonian Firms

Guy¹,

Mazra²

2012

IJBM

View full text Add to dashboard Cite

Research on trade credit has been growing in recent years, contributing to our understanding of the phenomenon. However, the main problem is probably the impact of the contingent nature of the payment practices used by companies. The purpose of this paper is to address the determinants of trade credit in the Cameroonian context. Based on a sample of 65 Cameroonian companies observed in 2006, the econometric investigations highlight a genuine financial intermediation business close to productive activity. We used a general model incorporating both financial variables, transactional and sociocultural in order to estimate the joint effect of all explanatory variables on the trade credit which is a kind of investment in business relationship. Logistic regression results confirmed the positive and significant correlation between rationing and trade credit. There is also apparent influence of contingency factors on sociocultural commercial time through social capital and ethnicity of trade and investment partners. Moreover the manager share of capital positively influences the duration of the trade credit where as the financial motive is one that mostly influences to the companies' behavior.

show abstract

“…Suivant cette logique, les PME sont souvent contraintes de financer une partie importante de leurs ventes par le biais du crédit interentreprises en raison d'un manque de réputation et d'une plus forte opacité (Long, Malitz et Ravid, 1993). Pour limiter cet inconvénient majeur, les firmes de taille réduite peuvent toutefois user, lorsque leur trésorerie le permet, de l'escompte commercial comme d'un moyen de réduction de la période de vérification (Lee et Stowe, 1993 Le crédit interentreprises est un élément déterminant du prix effectif des produits en raison de l'avantage ou du coût financier qu'il engendre selon sa configuration (avec ou sans escompte de règlement). À ce titre, il est une composante à part entière de la politique tarifaire du fournisseur (Schwartz, 1974).…”

Section: Les Théories Du Crédit Interentreprisesunclassified

Les pratiques de gestion du poste client

Ziane¹

2009

ipme

View full text Add to dashboard Cite

Résumé Dans cette contribution, nous examinons le rôle du crédit interentreprises dans le financement du cycle d’exploitation des PME françaises à l’aide d’une base de données construite à partir d’une enquête réalisée auprès d’un panel de chefs d’entreprise. L’analyse des comportements en matière de gestion des créances clients souligne l’importance stratégique de la taille et de la position des entreprises dans le processus de financement des ventes. En référence aux théories financières sur la question, nous testons une fonction d’offre de crédit interentreprises à l’aide de variables quantitatives et qualitatives. Les résultats obtenus valident principalement les motifs d’offre liés à une réduction des asymétries d’information entre les contractants.

show abstract

Product Risk, Asymmetric Information, and Trade Credit

Cited by 341 publications

References 5 publications

Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms

Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms

The Determinants of Trade Credit Demand: An Empirical Study from Cameroonian Firms

Les pratiques de gestion du poste client

Contact Info

Product

Resources

About