Mitigating moral hazard in financial leasing: The role of open banking

Abstract

Small and medium-sized manufacturers usually lack cashes to upgrade equipment that plays a role in manufacturing transformation. Financial leasing has emerged as an innovative instrument to address this challenge by rent installment with controlling equipment operations. To examine moral hazard arising from separation of ownership and control rights in leasing businesses, we consider a pull supply chain consisting of a capital-constrained manufacturer, a retailer providing production funds, and a lessor offering leased equipment. Our game-theoretical analysis shows the lessor’s screening ability and maintenance fees do not directly affect the manufacturer’s production quantity or the retailer’s wholesale price, regardless of open banking adoption. Moreover, while open banking reduces financial inclusion by restricting loans to unreliable lessees, it enables the lessor to set lower interest rates for reliable ones. The induced transaction transparency shows a moral hazard paradox where the reduced financial costs may outweigh the maintenance loss, and the manufacturer benefits from open banking. Conversely, the retailer is reluctant to open banking due to reduced transaction feasibility. We further find that the manufacturer is willing to share revenue with the retailer when the coefficient is moderate under open banking. Additionally, the lessor can monetize open banking data to incentivize manufacturer participation, creating a self-reinforcing loop of lower interest rates, higher data monetization, and expanded profit redistribution. Our findings show that a simple “one-size-fits-all” policy, armed with data-embedded revenue-sharing contracts can enhance social welfare despite financial inclusion.