| As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain contracting and inventory management. Using a series of stylized models that explicitly capture the interaction of firms' operational decisions and financial risks, this thesis attempts to develop a deeper understanding of trade credit from an operational perspective.;We first lay out a framework that incorporates capital constraints and costs of financial distress into the classical supply chain model and show that these frictions further reduce the chain efficiency under the price-only contract. Further, this model shows that a decentralized supply chain with appropriate contract forms can outperform the centralized chain.;Revolving around the question of what role trade credit plays in channel coordination and inventory financing,1 our model demonstrates that with demand uncertainty, trade credit enhances supply chain efficiency by serving as a risk-sharing mechanism. The optimal trade credit terms balance the operational profit and costs of financial distress. Facing a trade credit contract, the retailer finances his inventory using a portfolio of cash, trade credit, and short-term debt. The structure of this inventory financing portfolio depends on the retailer's financing need and bargaining power. Additionally, our model suggests that financial diversification, that is, employing multiple financing sources, provides an alternative explanation for the decentralization of some supply chains and the use of factoring in accounts receivable management. Using a sample of firm-level data from COMPUSTAT, we document the usage of trade credit in the retail sector, and confirm that the inventory financing pattern responds to firms' financing need.;Finally, we study how different priority rules influence trade credit terms and supply chain efficiency when multiple creditors are present. 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, we show that the supplier should extend unlimited trade credit with net terms. We also study the case when demand risk mingles with other risks, especially those with longer terms in nature. Under this setting, 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 high chain efficiency. Finally, we discuss the optimal priority when other trade credit theories are relevant.;1.The term "inventory financing" throughout this thesis applies to firms' decisions on how to finance inventory instead of how to use inventory as collateral to gain more loans. |
