Financing the Wrong Tier? Why Deep-Tier Suppliers Remain Vulnerable in Deep-Tier Finance

Deep-tier supply chain financing (DTF) is increasingly promoted as a way to extend affordable capital to small upstream suppliers and improve overall supply chain resilience. While such schemes are marketed as helping SMEs with limited access to the capital market, we show that they may in fact disadvantage the most upstream suppliers. Motivated by evidence from our industrial partner in the agrifood sector, we develop a game-theoretic model of a three-echelon supply chain with a buyer, a first-tier supplier, a secondtier supplier, and a financier. We study how DTF contracts-where the financier pays suppliers' processing fees and is repaid by the buyer-affect supplier incentives to invest in reliability under performance risk. We find that optimal contracts often subsidize the tier-1 supplier while charging high financing fees to the tier-2 supplier, leading to systematically higher reliability investments downstream than upstream. The intuition is that disruptions at tier-1 impose losses on both buyer and financier, whereas disruptions at tier-2 only affect the buyer through sunk raw material costs. Consequently, buyers have stronger incentives to support tier-1 reliability. We further show that these distortions widen as tier-1 reliability costs increase and that centralized coordination yields significantly higher profits and reliabilities than DTF schemes. However, supply chains deploying DTF solutions can be coordinated with penalty contracts.