Supplier credits, limited liquidity, and timely demand information

We consider supplier‐credit contracting between a manufacturer and a liquidity‐constrained dealer. We show that the timeliness according to which the dealer receives demand information has a significant impact on the optimal contract. If the manufacturer cannot be sure that a dealer without liquidity has demand information when the contract is written, the optimal contract assigns the same quantity to an ignorant dealer and a dealer who knows that there are unfavorable demand conditions. However, dealers with favorable demand information are screened. If the dealer’s liquidity rises, the manufacturer proposes a contract that resembles the solution of a classic adverse selection model in the spirit of Harris et al. (Manag Sci 28:604–620, 1982). For high liquidity, the optimal supplier‐credit contract assigns the same quantity to an ignorant dealer and dealers who have favorable demand information whereas dealers with unfavorable demand information are screened.