Delegation vs. Control of Component Procurement Under Asymmetric Cost Information and Simple Contracts

Kayış, Enis; Erhun, Feryal; Plambeck, Erica L.

doi:10.1287/msom.1120.0395

Cited by 104 publications

(47 citation statements)

References 21 publications

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“…; and electronics, Kayış et al. ), yet different in complexity. The authors experimentally determine the appropriate level of complexity, measured in the number of price blocks.…”

Section: Introductionmentioning

confidence: 99%

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

Kalkancı

Chen

Erhun

2014

Production and Operations Management

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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.

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“…; and electronics, Kayış et al. ), yet different in complexity. The authors experimentally determine the appropriate level of complexity, measured in the number of price blocks.…”

Section: Introductionmentioning

confidence: 99%

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

Kalkancı

Chen

Erhun

2014

Production and Operations Management

Self Cite

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“…This further implies that the presence of nonconvexities in the production process may necessitate the use of different and potentially more complex and expensive sourcing strategies as it is typically challenging to monitor and enforce cross-contingent contracts. Our results thus provide a rationale other than information asymmetries (see Kayış et al 2013) for why direct sourcing may be more attractive when the risk and/or costs associated with disruptive events is high. 11…”

Section: The Role Of Contractsmentioning

confidence: 75%

Multisourcing and Miscoordination in Supply Chain Networks

Bimpikis

Fearing

Tahbaz-Salehi

2018

Operations Research

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This paper studies sourcing decisions of firms in a multitier supply chain when procurement is subject to disruption risk. We argue that features of the production process that are commonly encountered in practice (including differential production technologies and financial constraints) may result in the formation of inefficient supply chains, owing to the misalignment of the sourcing incentives of firms at different tiers. We provide a characterization of the conditions under which upstream suppliers adopt sourcing strategies that are suboptimal from the perspective of firms further downstream. Our analysis highlights that a focus on optimizing procurement decisions in each tier of the supply chain in isolation may not be sufficient for mitigating risks at an aggregate level. Rather, we argue that a holistic view of the entire supply network is necessary to properly assess and secure against disruptive events. Importantly, the misalignment we identify does not originate from cost or reliability asymmetries. Rather, firms' sourcing decisions are driven by the interplay of the firms' risk considerations with nonconvexities in the production process. This implies that bilateral contracts that could involve under-delivery penalties may be insufficient to align incentives.

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“…Our focus on mechanism design and cascading adds to the literature on multi-tier supply chains. For multi-tier supply chains, the effects of delegation versus control have been studied in the academic literature (e.g., Kayış et al (2013)). We show that, despite being frequently studied, control may not be a feasible option, especially when the buyer has limited visibility and control over the upper parts of the supply chain.…”

Section: Resultsmentioning

confidence: 99%

“…One stream of this literature investigates supply chain hierarchies-delegation versus control for multi-tiered supply chains (Kayış et al 2013, Huang et al 2017. This stream implicitly assumes that the sub-supplier is visible to the buyer; i.e., the buyer has the option of controlling the supplier or the sub-supplier.…”

Section: Literature Reviewmentioning

confidence: 99%