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

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. © Springer-Verlag Berlin Heidelberg 2007.