Leveraging Trade Credit to Expand Informal Consumer Credit in Base-of-the-Pyramid Retail, a seminar by Professor Jan Fransoo (Tilburg University)

Leveraging Trade Credit to Expand Informal Consumer Credit in Base-of-the-Pyramid Retail

By Professor Jan C. Fransoo from Tilburg University

Abstract

Informal credit is extended by small independent grocery retailers (“nanostores”) to billions of base-of-the-pyramid consumers. We study whether supplier trade credit enables liquidity-constrained nanostore shopkeepers in developing economies to extend more informal credit to such liquidity-constrained consumers. To understand the behavioral underpinnings of informal credit, we develop an analytical model in which shopkeepers allocate limited working capital between base consumers, who always pay immediately upon arrival, and additional credit consumers, who pay later but carry default risk. The model predicts that relaxing working capital constraints through trade credit should increase optimal consumer credit provision, with negligible risk of supplier default when credit consumers are profitable on average. We subsequently test these predictions in a behavioral experiment and find systematic deviations from the theoretical benchmark. Participants exhibit mental accounting so that they become more conservative when working capital includes trade credit, discount trade credit more heavily than their own funds, fail to calibrate consumer credit provision, offering too little (much) when the risk is low (high), and fail to expand consumer credit provision even when effective capital increases. Finally, a simple change in repayment-penalty framing partially mitigates this mental-accounting effect.

About the speaker

Jan C. Fransoo is Professor of Operations and Logistics Management at the Tilburg School of Economics and Management. He has conducted research across a wide variety of domains and methodologies, all related to supply chain and operations management. His work has been published extensively in journals in operations management, operations research, and transportation. He currently serves as Department Editor of Management Science, Associate Editor of Decision Sciences and Senior Editor of Production and Operations Management. His current research studies retail operations and urban logistics in developing markets, transitions in the logistics industry, global supply chain dynamics, and the interaction of human decision makers with Advanced Analytics. Much of this research is conducted in collaboration with multinational companies, technology startups, and intergovernmental agencies. Fransoo holds a PhD in Operations Management from Eindhoven University of Technology. Prior to joining Tilburg, Fransoo was on the faculty at Kuehne Logistics University where he also served as Dean of Research, and at Eindhoven University of Technology where he also served as Dean of the University’s Graduate School. He currently holds courtesy appointments at Eindhoven University of Technology, Massachusetts Institute of Technology, and Politecnico di Milano.