Risk intermediation in supply chains

This paper demonstrates that an important role of intermediaries in supply chains is to reduce the ®nancial risk faced by retailers. It is well known that risk averse retailers when faced by the classical single-period inventory (newsvendor) problem will order less than the expected value maximizing (newsboy) quantity. We show that in such situations a risk neutral distributor can o€er a menu of mutually bene®cial contracts to the retailers. We show that a menu can be designed to simultaneously: (i) induce every risk averse retailer to select a unique contract from it; (ii) maximize the distributor's expected pro®t; and (iii) raise the order quantity of the retailers to the expected value maximizing quantity. Thus ineciency created due to risk aversion on part of the retailers can be avoided. We also investigate the in ̄uence of product/market characteristics on the o€ered menu of contracts.