A trade-credit-based incentive mechanism for a risk-averse retailer with private information

Abstract In a two-tier supply chain composed of a risk-neutral supplier and a risk-averse retailer, we consider the retailer’s sales cost to be private information and study the incentive effect of trade credit under information asymmetry. The model is formulated based on the principal–agent framework. We obtain the optimal trade credit contract configuration and further derive the optimal decision of the retailer, which are then compared with the results obtained from the benchmark case with symmetric information. We also analyze the influence of the retailer’s private information and risk-aversion behavior on the contract parameters and the retail price. The study shows that when the retailer’s risk aversion coefficient is within a certain range, the reasonable trade credit contract designed by the supplier can effectively encourage the retailer to report her real sales cost, and increase the supply chain profitability. Finally, numerical examples validate the theoretical model, and illustrate the impacts of private information and risk aversion on the profits of supply chain members and the system.