Gratitude, conscience, and reciprocity: Models of supplier motivation when quality is non-contractible

Standard game-theoretic models that apply principal-agent problems to analyse buyer–supplier relations have postulated that in a single-period game, the agent will not choose non-contractible quality. However, evidence exists that suppliers (or service providers) choose costly quality in non-contractible dimensions, even in absence of reputation concern, if they are offered a premium. Such actions violate the axiom of ‘individual rationality’ and are not subgame perfect in standard game theory, wherein only material payoffs are considered. This paper builds three models of supplier behaviour in a single-period Stackelberg-like buyer–supplier game by using the framework of psychological game theory and explains supplier motivations to choose quality on non-contractible dimensions in absence of any reputation effect. If the buyer offers a price higher than the market price, the supplier may be motivated to choose non-contractible quality due to a sense of gratitude, or because of his conscience, or in order to reciprocate kindness. The results show that maximum possible quality is chosen by the supplier only in the presence of a sufficiently strong sense of gratitude or a sufficiently strong conscience. However, the buyer is better-off with a fair supplier who is motivated to reciprocate than a supplier having a very poor sense of gratitude or one having a weak conscience, because the buyer can choose an optimal premium above market price to ensure that a fair and reciprocal supplier chooses an optimal quality.