Trade Credit in Supply Chains: Multiple Creditors and Priority Rules

Abstract

Priority rules determine the order of repayment to different creditors when the debtor cannot repay all of his debt. In this chapter, we study how different priority rules influence trade credit usage and supply chain efficiency under the risk-sharing role of trade credit. We find that with only demand risk, when the wholesale price is exogenous, trade credit with high priority can lead to high chain efficiency, yet trade credit with low priority allows more retailers to obtain trade credit and suppliers to gain higher profits. When the supplier has control of wholesale price, however, the supplier should extend unlimited trade credit, deeming priority rules irrelevant. When other non-demand risks, especially those with longer terms in nature, are present, we show several scenarios when the optimal trade credit policy should change according to different risks, and that in general, trade credit with low priority results in higher chain efficiency.