Decisions of Manufacturer and Bank under Trade Credit Insurance

Abstract

Trade credit insurance, as one of the most important risk management tools, has been widely used in companies' general operation. In this paper, we study a supply chain with a manufacturer and downstream partners (buyers). The manufacturer who allows its downstream partners to delay payment for goods already delivered, purchases trade credit insurance to transfer the non-payment risk, and loans money from the bank to deal with the capital constraint problem. Using Stackelberg game and loss-averse theory to establish newsboy model with trade credit insurance, this paper characterizes the optimal insurance coverage and total sales of the manufacturer as well as the interest rate decision of the bank.