The economics of factoring and securitizing accounts receivable

In Chapter I, the firm's accounts receivable sales decision is modeled both in the case where it is constrained to sell the entire receivable (factoring) and in the case where it has the flexibility to sell a portion of the receivable (receivables securitization.) It is found that because of a moral hazard problem on behalf of the firm, the factoring contract is characterized by the firm selling its highest credit quality receivables without recourse, its intermediate credit quality receivables with recourse, and keeping its poorest credit quality receivables. In contrast to factoring, the receivables securitization contract is characterized by the firm retaining a proportion of the receivable that is increasing in the receivable's credit risk. Chapter II demonstrates when and how the sale of accounts receivable can be used to mitigate an underinvestment problem. Lastly, Chapter II presents three rationales for factoring, and lays down the empirical groundwork for further productive research.