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Empirical relevance of contract types

A. Sadrieh, G. Voigt
Non-cooperative game-theory predicts that efficiency losses resulting from asymmetric information cannot be overcome if all supply chain parties are acting fully rational and opportunistic, because the less informed party will offer an inefficient screening contract. Yet, another stream of research highlights the importance of communication, trust, and trustworthiness in supply chain management and basically assumes that rather simple contract types (e.g., simple wholesale-price contracts) suffice for establishing efficient supply chain outcomes. We are performing a laboratory test of the competing views and find that the empirical relevance of the contract types differs across the tested scenarios. While we observe that simple wholesale-price contracts seem to be favored if there is a credible punishment option, we are also observing that screening contracts are more frequently used in diverging supply chains. Concerning screening contracts, we find that small pay-off differences typically applied to design incentive compatible contracting schemes have a double negative impact. First, because the supplier is reluctant to offer screening contracts because out-of-equilibrium play is anticipated and, second, because we do indeed observe out-of-equilibrium contract choices that cause huge supply chain losses.


contract types


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