Trade credit contract design under asymmetric corporate social responsibility information

Purpose To mitigate information asymmetry concerning corporate social responsibility (CSR) between the supplier and the retailer, we explore how the retailer designs a menu of trade credit contracts to screen the supplier's private CSR information. Design/methodology/approach We develop a stylized supply chain comprising a dominant retailer and a supplier. The supplier privately holds his CSR information, while the retailer only knows the prior distribution of supplier types. The dominant retailer provides a menu of trade credit contracts to differentiate the supplier's CSR type. Given the deferred payment involved in trade credit, we employ a two-stage game-theoretic framework to model the contractual relationship between the retailer and the supplier. Findings 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 information rent and efficiency loss. Moreover, the retailer can optimally design a menu of trade credit contracts to induce the supplier to disclose his true CSR type. 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. Originality/value The findings highlight the strategic role of trade credit contracts in screening the supplier's private CSR information, which provide practical suggestions for firms in mitigating CSR information asymmetry and improving supply chain coordination.