Signaling effects of trade credit contracts in a dual-financing framework

Herein, a dynamic signaling game model is developed to investigate how manufacturers strategically design trade credit (TC) contracts within a dual-financing framework that integrates TC and bank credit, thereby mitigating information asymmetry between banks and small- and medium-sized resellers (SMRs). The results demonstrated that manufacturers can offer different TC interest rates to SMRs to help banks identify their types, provided production costs are low and SMRs possess relatively high initial capital. However, as initial capital diminishes, manufacturers are compelled to raise TC interest rates and elevate the TC ratio above a critical threshold based on wholesale price elasticity and SMR cost coefficients to sustain a separating equilibrium. Conversely, when production costs are high or initial capital is severely limited, a pooling strategy emerges as optimal, prompting manufacturers to abandon separation efforts. These findings underscore the importance of incorporating operational factors into banks’ credit risk assessments to enhance the evaluation of TC’s signaling function.