Trade Credit Term Decision Under Boundary Logistic Default Risk

This paper applies principal-agent model to solve the optimal trade credit term considering default risk explicitly. A boundary Logistic model is used to measure default risk of the buyer. By solving the lower level optimization problem of the buyer, the principal-agent model reduces to a non-linear programming. An incentive-compatible decision of term is thus obtained by solving this nonlinear programming. Numerical simulation analysis shows that the incentive-compatible term is a non-increasing concave function of default risk, slightly affected by the risk attitude.