| Abstract: | We examine the role of trade credit insurance in a capital‐constrained supply chain with one (or two) loss‐neutral retailer(s) and one loss‐averse manufacturer. We model the interplay between these supply chain participants as a Stackelberg game and analyze their operating and financing decisions. In one capital‐constrained retailer case, we find that either the manufacturer's high loss aversion level or the retailer's low initial capital motivates the manufacturer to adopt insurance. Insurance drives more credit financing with more attractive financing terms (a lower wholesale price), which promotes the manufacturer to collect better product sales and performance. Although the retailer enjoys improved profit from insurance, its default risk increases. In contrast, in one capital‐constrained retailer and one well‐funded retailer scenario, numerically, when the manufacturer's loss aversion level is high or the weak retailer's initial capital is low, insurance is also adopted but is not always preferred by the capital‐constrained retailer due to competition. In addition, as the demand substitution rate increases, the manufacturer is more likely to prefer insurance due to better performance. |
