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

Hsiao-Hui Lee, S. Alex Yang () and Kijin Kim ()
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Hsiao-Hui Lee: National Chengchi University
S. Alex Yang: London Business School

No 599, ADB Economics Working Paper Series from Asian Development Bank

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 (search for similar items in EconPapers)
JEL-codes: O14 O24 O31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019-12-11
New Economics Papers: this item is included in nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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