Trade Credit Insurance for the Capital-Constrained Supplier

Abstract

This paper examines the role of trade credit insurance in a supply chain consisting of a capital-constrained supplier and a capital-constrained retailer. The retailer faces stochastic market demand and seeks trade credit from the supplier. The supplier, who is the Stackelberg game leader, decides the production quantity and the insurance coverage rate. We find that when the supplier’s initial capital is not sufficient, the use of trade credit insurance may reduce the trade quantity and the expected profit of the retailer. However, when the initial capital of the supplier is sufficient, the use of trade credit insurance will always increase the trade quantity. In the extension, we assume the supplier will face a potential financing cost if the net income is lower than the threshold. We find that if the insurance company has to keep its expected return positive and has no way to invest the insurance premium, the supplier will never buy the trade credit insurance no matter how much the marginal financing cost is when threshold is outside a certain range. Both the results and the methods in this paper can help businesses achieve a balance of funds and the logistics of the supply chain and risks, thereby improving the effectiveness of the supply chain operation.