Risk intermediation in supply chains

This paper demonstrates that an important role of intermediaries in supply chains is to reduce the financial risk faced by retailers. It is well known that risk averse retailers when faced by the classical single-period inven tory (newsvendor) problem will order less than the expected value maximizin g (newsboy) quantity. We show that in such situations a risk neutral distri butor can offer a menu of mutually beneficial contracts to the retailers. W e 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 dis tributor's expected profit; and (iii) raise the order quantity of the retai lers to the expected value maximizing quantity. Thus inefficiency created d ue to risk aversion on part of the retailers can be avoided. We also invest igate the influence of product/market characteristics on the offered menu o f contracts.