5/2/24 | 4:15pm | E51-376

Wenqiang Xiao

Professor
NYU

Abstract: We study platform financing in comparison to trade credit when lending to third-party sellers with either exogenous or endogenous default risk. By offering low-rate finance to a seller, the platform can potentially increase its commission but also expose itself to the risk of seller default. Under exogenous default risk, platform financing not only subsidizes the seller's procurement but also isolates the supplier, effectively decoupling the wholesale price from downstream default risk. This risk isolation function helps avoid stimulation of double marginalization. Platform financing arises in equilibrium, benefiting all parties, when the business faces significant exogenous failure risk, has high product costs, operates in a small market, or has a high commission rate. Interestingly, with endogenous default risk, the seller may act opportunistically, exacerbated by the supplier's response under trade credit. Platform financing can mitigate the seller's opportunism and dampen the supplier's reaction, to either prevent or reduce the default risk. The effects of product costs and market uncertainty on the equilibrium outcome may exhibit non-monotonic behavior. Platform financing may arise when the product cost is intermediate or sufficiently high, but not in between, and when the market uncertainty is moderate but not low or high. Under exogenous default risk, the seller's initial capital always benefits platform financing; whereas, under endogenous default risk, the impact becomes more nuanced, as it can also play a role in mitigating her opportunistic behavior. In our setting, imposing a credit limit does not affect either trade credit or platform financing.

Bio: Wenqiang Xiao is a professor of Technology, Operations, and Statistics at the Stern School of Business of New York University. Professor Xiao's research interests are primarily focused on designing and evaluating incentive mechanisms under supply chain settings and more generally, the principal-agent framework. In particular, he is interested in investigating incentive conflicts among parties with asymmetric information. He is an associate editor of Management Science and a senior editor of POM. Professor Xiao received his Ph.D. in Decision, Risk and Operations from Columbia Business School.