Trade credit term determination under supply chain coordination: a principal-agent model

Authors:
Xiao-Jun Shi;Zhen-Xia Zhang;Fang-Fei Zhu
Affiliations:
School of Economics & Management, Beijing University of Aeronautics and Astronautics, Beijing, PRC;Institute of Electronics, Chinese Academy of Science, Beijing, PRC;School of Economics & Management, Beijing University of Aeronautics and Astronautics, Beijing, PRC
Venue:
ICIC'07 Proceedings of the intelligent computing 3rd international conference on Advanced intelligent computing theories and applications
Year:
2007

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Abstract

Different from previous literature on credit term determination mainly applying financial marginal analysis method, this paper proposes a novel idea to model trade credit term determination as an incentive mechanism design problem under supply chain coordination in principal-agent framework. With application of Schwartz' financing motive theory, a new form of supplier's net cost function is derived which makes it possible to find an approximation closed-formed solution to term determination. Using approximation and integration techniques, we find the explicit close-formed approximation solutions to the optimal payment time for the retailer and credit term for the supplier.