On the Role of Receivables in Managing Salesforce Incentives
Despite the obvious problems associated with collections, firms routinely sell on credit. Conventional wisdom suggests offering credit is a necessary evil when dealing with insistent cash-constrained customers. This paper provides a more positive view of trade credit. We find that offering credit can enhance the efficiency of incentive contracts with sales personnel. In effect, with a credit sale, a client gets a second chance to generate enough cash. The client's second chance gives the sales agent another opportunity to demonstrate his past diligence to the firm. Moreover, to limit the risk associated with the fact that even a high-quality client may fail to eventually come up with funds, the firm relies on the accrual system. In particular, the agent's (discretionary and early) choice of the bad debt allowance conveys his private information regarding client quality; the payments associated with subsequent collections/default keep such reporting in check.
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Volume (Year): 15 (2006)
Issue (Month): 3 ()
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References listed on IDEAS
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- Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
- Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
- Mitchell A. Petersen & Raghuram G. Rajan, 1996.
"Trade Credit: Theories and Evidence,"
NBER Working Papers
5602, National Bureau of Economic Research, Inc.
- Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
- Arya, Anil & Mittendorf, Brian, 2005. "Offering stock options to gauge managerial talent," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 189-210, December.
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