The Role of Fintech in Mitigating Information Friction in Supply Chain Finance

36 Pages Posted: 5 May 2020

See all articles by Hsiao-Hui Lee

Hsiao-Hui Lee

National Chengchi University (NCCU) - Department of Management Information Systems

S. Alex Yang

London Business School

Kijin Kim

Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD)

Multiple version iconThere are 2 versions of this paper

Date Written: December 11, 2019

Abstract

Micro, small, and medium-sized enterprises in developing countries face severe financing difficulties, especially when trying to expand internationally. “Information friction” is a significant cause of this financing gap. Recent financial technologies (fintech) can improve supply chain finance efficiency. This paper therefore proposes a conceptual and analytical framework to study how fintech can close the financing gap by reducing information friction. We classify fintech into two categories: information processing technology (Type-A) and information collecting technology (Type-B) and find that both help close the financing gap by lowering the probability of misclassification of good firms as bad. Banks’ optimal Type-A investment increases in the bank’s size, profit margin, and the fraction of good firms in the market. They invest in Type-B if and only if the investment is sufficiently small. Due to “double marginalization,” a bank’s optimal fintech investment is lower than a socially optimal level, calling for mechanisms to incentivize or complement banks’ investment in fintech.

Keywords: artificial intelligence, digitization, fintech, information friction, supply chain finance

JEL Classification: O14, O24, O31

Suggested Citation

Lee, Hsiao-Hui and Yang, S. Alex and Kim, Kijin, The Role of Fintech in Mitigating Information Friction in Supply Chain Finance (December 11, 2019). Asian Development Bank Economics Working Paper Series No. 599, Available at SSRN: https://ssrn.com/abstract=3590850 or http://dx.doi.org/10.2139/ssrn.3590850

Hsiao-Hui Lee

National Chengchi University (NCCU) - Department of Management Information Systems ( email )

No. 64, Section 2, Zhǐnán Rd
Wenshan District
Taipei City
Taiwan

S. Alex Yang

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/sayang/

Kijin Kim (Contact Author)

Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD) ( email )

Philippines

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