Financing a dual capital-constrained supply chain: Profit enhancement and diffusion effect of default risk

Supply chain finance (SCF) benefits participants by alleviating capital constraints and generating additional profits but also brings a host of disadvantages. This study examines and compares how various SCF schemes affect participants’ profits and the contagion and diffusion effects of default risk in a dual capital-constrained supply chain. This study used a game theoretical approach to investigate a dual capital-constrained supply chain. The financially constrained manufacturer and retailer may be funded by bank credit or trade credit from their upstream participants, forming four financing structures. The findings suggest that although trade credit offered by the manufacturer brings more profits to the supply chain participants than bank credit, it increases the expected losses of the creditors and incurs both the contagion and diffusion effects of default risk. Pure bank financing cannot completely coordinate the supply chain but can control the contagion and diffusion effects of default risk. These effects are also weakened over time. The findings offer implications for participants who implement financing and operational actions to improve their performance and control the contagion and diffusion effects of default risk along a supply chain.