Optimal portfolio financing selection in a capital-constrained supply chain with risk-averse members

ABSTRACT

We first consider a supplier-retailer supply chain in which only the capital-constrained retailer is risk-averse while the supplier and the bank both are risk-neutral. The newsvendor-like retailer may fund its business by two portfolio financing schemes to satisfy uncertain market demand: (1) bank loans and the supplier’s equity investment (BCF-SI) and (2) bank loans and the supplier’s credit guarantee (BCF-SG). Using CVaR criterion, we model the behaviour of the risk-averse retailer to analytically derive the portfolio financing equilibrium in a Stackelberg supplier-led game separately for two portfolio financing schemes. We characterize the conditions under which the supplier and the retailer reach Pareto improvement under two portfolio financing schemes compared with the non-financing benchmark. Moreover, we extend the model to the case in that the supplier and retailer both are risk-averse while only the bank is risk-neutral to further investigate the impact of risk aversion on the optimal financing scheme selection. The numerical examples verify our theoretical results.

KEYWORDS:

• Capital constraint
• risk aversion
• portfolio financing
• bank loans and the supplier’s equity investment
• bank loans and the supplier’s credit guarantee

JEL CLASSIFICATION:

• C51
• C72

Acknowledgments

The research is supported by the National Natural Science Foundation of China under Grant Nos. 72071072, 71571065, 71521061 and 71790593.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [72071072, 71571065, 71521061, 71790593].