Complexity as a Contract Design Factor: A Human‐to‐Human Experimental Study

Abstract

Despite being theoretically suboptimal, simpler contracts (such as price‐only contracts and quantity discount contracts with limited number of price blocks) are commonly preferred in practice. Thus, exploring the tension between theory and practice regarding complexity and performance in contract design is especially relevant. Using human subject experiments, Kalkancı et al. (2011) showed that such simpler contracts perform effectively for a supplier interacting with a computerized buyer under asymmetric demand information. We use a similar set of experiments with the modification that a human supplier interacts with a human buyer. We show that human interactions strengthen the supplier's preference for simpler contracts. We find that suppliers have fairness concerns even when they interact with computerized buyers. These fairness concerns tend to be even stronger when suppliers interact with human buyers, particularly when the complexity of the contract is low. We also find that suppliers are more prone to random decision errors (i.e., bounded rationality) when interacting with human buyers. In the absence of social preferences, Kalkancı et al. identified reinforcement and bounded rationality as key biases that impact suppliers' decisions. In human‐to‐human experiments, we find evidence for social preference effects. However, these effects may be secondary to bounded rationality.

Push, Pull, or Both? A Behavioral Study of How the Allocation of Inventory Risk Affects Channel Efficiency

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Behavioral Contract Design Under Asymmetric Forecast Information

“…A general insight from the experimental literature on menus of contracts in supply chains is that they perform worse than theoretically predicted. Kalkanci, Chen, and Erhun (, ) analyze the impact of contract complexity on the decision biases of the contract‐offering party (i.e., the supplier). This literature shows that suppliers do not leverage the full benefit of a menu of contracts because they tend to set the price breaks for an all‐unit quantity discount suboptimally.…”

The Effect of Communication Media on Information Sharing in Supply Chains

“…, Kalkanci et al. , , Sadrieh and Voigt ). A general pattern in all of these experiments is that non‐linear contracts reduce efficiency losses, but not to the extent theoretically expected.…”