Trade Credit with Costly Sales Revenue Verification.

This article investigates the impact of costly sales revenue verification on trade credit contracts between suppliers and retailers, focusing on wholesale-price net-terms financing. Using a game-theoretic model, it analyzes how positive verification costs affect the equilibrium wholesale price, loan limit, and supplier profit. Contrary to intuition, the study finds that suppliers may achieve higher expected profits when verification costs are positive—particularly when the retailer’s assets and verification costs are moderate—because retailers tend to order more aggressively, increasing supplier revenue despite verification expenses. The paper characterizes the retailer’s optimal order quantity and the supplier’s contract terms across different asset and verification cost ranges, showing that loan limits are strategically imposed mainly when retailer assets are low. Numerical experiments confirm that positive verification costs can enhance supplier profit, retailer wealth, and overall supply chain profit under certain conditions. These findings offer managerial insights for suppliers with pricing power, suggesting that concerns about sales transparency may be less critical when verification costs and retailer assets are in the midrange, and highlighting how contract levers can be used to capture gains from costly verification.