Information asymmetry in trade credit: an operations management perspective

Abstract

Trade credit has become an effective financing method that helps alleviate the financing pressures of firms. Although information asymmetry is widespread among supply chain members, its implications in the context of trade credit remain insufficiently explored. Motivated by this gap, this thesis investigates how different forms of information asym metry influence the financing and operational strategies of firms, as well as the roles of information disclosure and screening mechanisms in mitigating such asymmetries under trade credit. Based on a systematic review of relevant literature, this thesis fo cuses on three types of information asymmetry: financial contractual term information asymmetry, demand information asymmetry, and corporate social responsibility (CSR) information asymmetry. Using game-theoretical models, it systematically analyzes firms’ financing and operational decisions under each type of asymmetry. The main research contents are elaborated as follows:

First, this thesis examines howfinancialcontractinvisibility interacts with bankrup tcy risks faced by the capital-constrained retailers, as well as how this interaction affects the strategic decisions and profitability of firms in a competing supply chain. Under financial contract invisibility, a retailer cannot observe the financial contractual term between the manufacturer and the rival retailer. Results show that the manufacturer adopts a discriminatory wholesale pricing strategy toward identical retailers when the demand uncertainty is medium. In particular, when the competition intensity is low, financial contract invisibility increases the manufacturer’s inclination to employ this pricing strategy. Meanwhile, this invisibility reduces the bankruptcy risks for the retailers who face financial distress when the competition intensity is high, but increases such risks when the competition intensity is low. We further identify an intriguing finding that one retailer and the overall supply chain may obtain higher profits under visible financial contracts, depending on competition intensity and demand uncertainty.

Second, this thesis investigates the effects of demand information transparency on the retailers’ bankruptcy risks and firms’ performance in two competing supply chains under trade credit. The retailers possess private demand signal information, which may or may not be observed by the manufacturers depending on the information regime. Results show that information transparency reduces the retailers’ bankruptcy risk under the low demand signal regardless of the signal accuracy, while it unexpectedly reduces the retailers’ bankruptcy risk under the high demand signal when the signal accuracy is low. In addition, we find that under trade credit, information transparency may harm the manufacturers and benefit the retailers, depending on demand uncertainty and signal accuracy. Moreover, information transparency may generate both “Win-Win” and “Lose-Lose” outcomes for all parties involved in competing supply chains.

Third, this thesis studies how the retailer designs a menu of trade credit contracts to screen the supplier’s private CSR information, as well as whether trade credit contract achieves supply chain coordination under full or asymmetric CSR information. The supplier privately holds his CSR information, while the retailer only knows its prior distribution. As thedominantparty, theretailerprovidesamenuoftradecreditcontracts, each specifying the order quantity and the upfront payment, todifferentiate thesupplier’s CSRtypes. Results show that under full CSR information, the trade credit contract can effectively coordinate the supply chain only when the supplier’s reservation profit is high. Conversely, under asymmetric CSR information, the trade credit contract fails to coordinate the supply chain because of the information rent and the efficiency loss. In addition, the retailer can optimally design a menu of trade credit contracts to induce the supplier to disclose his true CSR type. Depending on the supplier’s reservation profit and the wholesale price, the retailer can strategically adjust the first-stage payment to be either zero or positive for each supplier type. Notably, the trade credit contract performs better in coordinating the supply chain than the non-trade-credit contract. Moreover, when the supplier’s reservation profit is low, the retailer provides a pooling contract, whereas when the reservation profit is high, the retailer provides a separate menu of contracts. In particular, the optimal menu of contracts assigns a higher order quantity and a lower first-stage payment to the high CSR supplier, thereby ensuring a higher profit than the low CSR supplier.

Overall, the thesis contributes by comprehensively examining the impacts of various types of information asymmetry in trade credit, considering its multidimensional (hor izontal and vertical), multi-perspective (demand and supply side), and multi-attribute (exogenous and endogenous) nature. The thesis further explores how these information asymmetries affect the financing and operational decisions of firms, and investigates the role of information disclosure and screening mechanisms in mitigating such asymme tries. The findings not only complement and extend the existing literature on information asymmetry and trade credit, but also provide valuable managerial insights for industry practitioners regarding how to manage bankruptcy risks and respond to information asymmetry in financing contexts.

Date of Award	19 Jul 2026
Original language	English
Awarding Institution	University of Nottingham
Supervisor	Zhen Tan (Supervisor), Zelong Yi (Supervisor) & Hing Kai Chan (Supervisor)