The economics of factoring accounts receivable

A moral hazard problem develops when a factor cannot contract upon a seller's ex-post level of credit management. Because of the deleterious price impact of the moral hazard problem, sellers with a sufficiently high bankruptcy risk may be unable to factor their entire accounts receivable pool, even though they offer recourse. The structure of the equilibrium factoring contract is empirically tested using new factoring-specific data. It will be found that the credit quality of the seller's accounts receivable pool and the seller's probability of bankruptcy both have a negative impact upon the seller's propensity to factor with recourse.