Showing papers by "John R. Birge published in 2017"
TL;DR: In this paper, a model that explicitly captures the interaction of firms' operations decisions, financial constraints, and multiple financing channels (bank loans and trade credit) was proposed to better understand the risk-sharing role of trade credit.
Abstract: As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms’ operations decisions, financial constraints, and multiple financing channels (bank loans and trade credit), this paper attempts to better understand the risk-sharing role of trade credit—that is, how trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a disadvantageous position in managing default relative to a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer’s financial status is relatively strong. Accordingly, trade credit is the only external source that the retailer uses to finance inventory. By contrast, if the retailer’s cash level is low, the supplier ...
256 citations
TL;DR: This paper attempts to better understand the risk-sharing role of trade credit—that is, how trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier.
Abstract: As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms' operations decisions, financial constraints, and multiple external financing channels (bank loans and trade credit), this paper attempts to develop a deeper understanding of the risk-sharing role of trade credit, that is, trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a clearly disadvantageous position in managing default than a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer's financial status is relatively strong. Accordingly, trade credit is the only external source the retailer uses to finance inventory. By contrast, if the retailer's cash level is low, the supplier offers two-part terms, inducing the retailer to finance inventory with a portfolio of trade credit and bank loans. Further, a deeper early-payment discount is offered when the the supplier is relatively less efficient in recovering defaulted trade credit, or the retailer has stronger market power. Trade credit allows the supplier to take advantage of the retailer's financial weakness, yet it may also benefit both parties when retailer's cash is reasonably high. Finally, using a sample of firm-level data on US-based retailers, we empirically observe the inventory financing pattern that is consistent with what our model predicts.
168 citations
TL;DR: It is proved that the stochastic clearing formulation proposed by Pritchard et al. (2010) yields price distortions that are bounded by the bid prices, and it is shown that adding a similar penalty term to transmission flows and phase angles ensures boundedness throughout the network.
Abstract: We argue that deterministic market clearing formulations introduce arbitrary distortions between day-ahead and expected real-time prices that bias economic incentives. We extend and analyze a previously proposed stochastic clearing formulation in which the social surplus function induces penalties between day-ahead and real-time quantities. We prove that the formulation yields price bounded price distortions, and we show that adding a similar penalty term to transmission flows and phase angles ensures boundedness throughout the network. We prove that when the price distortions are zero, day-ahead quantities equal a quantile of their real-time counterparts. The undesired effects of price distortions suggest that stochastic settings provide significant benefits over deterministic ones that go beyond social surplus improvements. We propose additional metrics to evaluate these benefits.
60 citations
TL;DR: In this paper, an inverse optimization-based methodology is proposed to determine market structure from commodity and transportation prices in locational marginal price-based electricity markets where prices are shadow prices in the centralized optimization used to clear the market.
Abstract: We propose an inverse optimization-based methodology to determine market structure from commodity and transportation prices. The methods are appropriate for locational marginal price-based electricity markets where prices are shadow prices in the centralized optimization used to clear the market. We apply the inverse optimization methodology to outcome data from the Midcontinent ISO electricity market (MISO) and, under noise-free assumptions, recover parameters of transmission and related constraints that are not revealed to market participants but explain the price variation. We demonstrate and evaluate analytical uses of the recovered structure including reconstruction of the pricing mechanism and investigations of locational market power through the transmission constrained residual demand derivative. Prices generated from the reconstructed mechanism are highly correlated to actual MISO prices under a wide variety of market conditions. In a case study, the residual demand derivative is shown to be corr...
52 citations
TL;DR: In this paper, a panel of Credit Default Swap (CDS) spreads and supply chain links is used to observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market.
Abstract: Using a panel of Credit Default Swap (CDS) spreads and supply chain links, we observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market. Particularly, the three-day cumulative abnormal CDS spread change (CASC) is 63 basis points for firms whose customers experienced a CDS up-jump event (an adverse credit shock). The value is 74 basis points if their suppliers experienced a CDS up-jump event. The corresponding three-day CASC values are −36 and −38 basis points, respectively, for firms whose customers and suppliers, respectively, experienced an extreme CDS down-jump event (a favorable credit shock). These effects are approximately twice as large for adverse credit shocks originating from natural disasters. Credit shock propagation is absent in inactive supply chains, and is amplified if supply-chain partners are followed by the same analysts. Industry competition and financial linkages between supply chain partners, such as trade credit and large sales exposure, amplify the shock propagation along supply chains. Strong shock propagation persists through second and third supply-chain tiers for adverse shocks but attenuates for favorable shocks.
30 citations
TL;DR: In this article, the authors proposed an inverse optimization based methodology to determine market structure from the locational pricing of a commodity, which requires that the market optimally allocates goods and that locational prices correspond to shadow prices of this optimization problem.
Abstract: We propose an inverse optimization based methodology to determine market structure from the locational pricing of a commodity. The methodology requires that the market optimally allocates goods and that locational prices correspond to shadow prices of this optimization problem. As a case-in-point, we study locational marginal price based electricity markets where prices are determined using the results of a centralized optimization for clearing the market. We apply the inverse optimization methodology to outcome data from the Midcontinent ISO electricity market and uncover transmission constraints that are not revealed to market participants but explain the price variation. We demonstrate analytical uses of the recovered structure including reconstruction of the pricing mechanism and identifying locational residual demand derivatives which have managerial applications not limited to optimization of bidding strategies and estimation of the value of capacity investments. To broaden the scope of applications, assumptions sufficient to justify the methodology for competitive markets are described.
26 citations
TL;DR: A numerical analysis indicates that the investor significantly accounts for contagion effects when making investment decisions, and that his strategy depends nonmonotonically on the aggregate risk level.
Abstract: We consider an optimal risk-sensitive portfolio allocation problem accounting for the possibility of cascading defaults. Default events have an impact on the distress state of the surviving stocks in the portfolio. We study the recursive system of non-Lipschitz quasi-linear parabolic HJB-PDEs associated with the value function of the control problem in the different default states of the economy.We show the existence of a classical solution to this system via super-sub solution techniques and give an explicit characterization of the optimal feedback strategy in terms of the value function. We prove a verification theorem establishing the uniqueness of the solution.A numerical analysis indicates that the investor accounts for contagion effects when making investment decisions, reduces his risk exposure as he becomes more sensitive to risk, and that his strategy depends non-monotonically on the aggregate risk level.
15 citations
TL;DR: In this article, the authors consider an optimal risk-sensitive portfolio allocation problem accounting for the possibility of cascading defaults and show that default events have an impact on the distress state of the surviving stocks in the portfolio.
Abstract: We consider an optimal risk-sensitive portfolio allocation problem accounting for the possibility of cascading defaults. Default events have an impact on the distress state of the surviving stocks in the portfolio. We study the recursive system of non-Lipschitz quasilinear parabolic HJB-PDEs associated with the value function of the control problem in the different default states of the economy. We show the existence of a classical solution to this system via super-sub solution techniques and give an explicit characterization of the optimal feedback strategy in terms of the value function. We prove a verification theorem establishing the uniqueness of the solution. A numerical analysis indicates that the investor significantly accounts for contagion effects when making investment decisions, and that his strategy depends nonmonotonically on the aggregate risk level.
12 citations
TL;DR: In this paper, the authors identify customers' strategic waiting behavior as a source of a firm's cost of financial distress, and they also find that customers' anticipation of bankruptcy can be self-fulfilling: when customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when they anticipate a low probability of bankruptcy.
Abstract: The presence of strategic customers may force an already financially distressed firm into a death spiral: sensing the firm’s financial difficulty, customers may wait strategically for deep discounts in liquidation sales. In turn, such waiting lowers the firm’s profitability and increases the firm’s bankruptcy risk. Using a two-period model to capture these dynamics, this paper identifies customers' strategic waiting behavior as a source of a firm’s cost of financial distress. We also find that customers' anticipation of bankruptcy can be self-fulfilling: when customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when customers anticipate a low probability of bankruptcy. Such behavior has important operational and financial implications. First, the firm acts more conservatively when facing either more severe financial distress or a large share of strategic customers. As its financial situation deteriorates, the firm lowers ...
8 citations
TL;DR: In this paper, the authors present an online appendix for When Customers Anticipate Liquidation Sales: Managing Operations under Financial Distress, and the full paper is available here: http://ssrn.com/abstract=2652994.
Abstract: This is the online appendix for When Customers Anticipate Liquidation Sales: Managing Operations under Financial Distress.
The full paper is available here: http://ssrn.com/abstract=2652994.