Production operations, financing and information asymmetry in a supply chain with a random yield

Abstract

ABSTRACT This paper studies bank loan and advance payment in a random yield supply chain, consisting of one core manufacturer and one capital-constrained supplier who possesses private information on the supply state. With an information advantage, the supplier has a motive to hide his actual capital requirements to obtain more funds and shift to other risky projects. We focus on the credit contract design, which helps effectively prevent the supplier’s excess debt motive. We characterize the supplier’s best response, the optimal contract menus and all participators’ profits under information symmetry and asymmetry, respectively. By designing the credit contract, creditors can effectively prevent funds from flowing out of the supply chain in asymmetric cases. We then investigate the willingness of creditors to provide financing. Our findings show that the bank is always willing to provide financial support, regardless of the information state. However, the manufacturer’s willingness to provide a loan depends on the value of the supplier’s reservation profit. In addition, advance payment is preferable over bank loan for the supplier. Furthermore, we explore the value of information, illustrating that information harms the supplier but benefits creditors in most cases.