Decision Making In Trade Credit Financing: Impact Of Loss Aversion And Power Imbalance

We incorporate loss aversion and power imbalance into a trade credit contract that sets both wholesale price and payment ratio at ordering time. Our models are based on a dyadic supply chain consisting of a loss-averse supplier and a capital-constrained retailer who can get finance via bank credit or trade credit. We derive the optimal trade credit contract under the retailer-dominant noncooperative (RDN) and the supplier-dominant noncooperative (SDN) games. Our results show that the impact of the supplier's loss aversion depends on whether the supplier dominates the supply chain. Specifically, under RDN scenario, a single bank credit should be adopted by the retailer, irrespective of the supplier's loss aversion. Under SDN scenario, however, a hybrid of bank credit and trade credit should be provided to the retailer when the supplier's loss aversion level exceeds a critical threshold value, and a single trade credit should be granted otherwise. Moreover, we find that the capital-constrained retailer may benefit from the supplier's loss aversion behavior. Finally, we conduct a serial of numerical examples to develop more managerial insights.