Multidimensional Signaling with Supplier Credit Guarantees

This paper investigates credit guarantees in a supply chain setting involving a supplier, a capital-constrained buyer, and a bank. We find that under complete information, credit guarantees increase order quantities but paradoxically raise wholesale prices, overall rendering the credit guarantee not useful for improving the operational efficiency. However, under information asymmetry, either a partial or full guarantee emerges in equilibrium, with the wholesale price maintained at its optimal full-information level. This underscores the pivotal role of credit guarantees in effective signaling and delineates the distinct functions of the wholesale price and the guarantee—the former on operational efficiency and the latter on signaling efficacy. Further comparative analysis of the supplier and buyer performances under the two contract types reveals that credit guarantees do not always benefit both parties. This paper was accepted by Jayashankar Swaminathan, operations management. Funding: H. Liu was supported by the National Natural Science Foundation of China [Grants 72272149 and 72394374]. H. Song was supported by the National Natural Science Foundation of China [Grants 72501259 and W2411062]. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2024.07052 .