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Manufacturer–retailer contracting with asymmetric information on retailer's degree of loss aversion

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  • Deng, Xiaoxue
  • Xie, Jinxing
  • Xiong, Huachun

Abstract

In a recent paper [Wang C., Webster S., 2007. Channel coordination for a supply chain with a risk-neutral manufacturer and a loss-averse retailer. Decision Sciences 38 (3), 361–389.], the authors study a supply chain consisting of a risk neutral manufacturer and a loss averse retailer and show that the supply chain can be coordinated by three contracts: buy back (BB), gain/loss sharing (GL) and gain/loss sharing and buy back (GLB). They assume that the retailer's degree of loss aversion is common knowledge. However, this assumption cannot reflect real situations, since in the real industry, one party's degree of loss aversion is usually unknown by other parties. In the present paper, we propose a principal-agent model, assuming the retailer's degree of loss aversion to be asymmetric information. Within the principal-agent framework, we obtain the following results: (1) An optimal MGL (modified GL) contract menu, which is based on the GL contract studied in Wang and Webster (2007), is derived for the manufacturer (the principal) by mechanism design theory; (2) Under the MGL contract menu, information asymmetry lowers the production quantity, decreases the manufacturer's profit and deteriorates supply chain performance, while increasing the retailer's utility; (3) The MGL contract menu can coordinate the supply chain with asymmetric information in an implementable way if the wholesale price is endogenously determined by the manufacturer and its lower bound is 0.

Suggested Citation

  • Deng, Xiaoxue & Xie, Jinxing & Xiong, Huachun, 2013. "Manufacturer–retailer contracting with asymmetric information on retailer's degree of loss aversion," International Journal of Production Economics, Elsevier, vol. 142(2), pages 372-380.
    • Handle: RePEc:eee:proeco:v:142:y:2013:i:2:p:372-380
    DOI: 10.1016/j.ijpe.2012.12.013
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    References listed on IDEAS

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    1. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
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    Cited by:

    1. Keyuan Cai & Zhen He & Yaqi Lou & Shuguang He, 2020. "Risk-aversion information in a supply chain with price and warranty competition," Annals of Operations Research, Springer, vol. 287(1), pages 61-107, April.
    2. Yan, Nina & Xu, Xun & Huang, Wenyi, 2021. "Supplier's capacity investment strategy with factoring finance," International Journal of Production Economics, Elsevier, vol. 238(C).
    3. Chen, Yenming J. & Sheu, Jiuh-Biing, 2017. "Non-differentiated green product positioning: Roles of uncertainty and rationality," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 103(C), pages 248-260.
    4. Rahimi-Ghahroodi, S. & Al Hanbali, A. & Zijm, W.H.M. & Timmer, J.B., 2020. "Multi-resource emergency supply contracts with asymmetric information in the after-sales services," International Journal of Production Economics, Elsevier, vol. 229(C).
    5. Vipin, B. & Amit, R.K., 2017. "Loss aversion and rationality in the newsvendor problem under recourse option," European Journal of Operational Research, Elsevier, vol. 261(2), pages 563-571.
    6. Cui-Hua Zhang & Peng Xing & Jin Li, 2018. "Optimal Strategy of Social Responsibility and Quality Effort in Service Supply Chain with Quality Preference," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 35(03), pages 1-43, June.
    7. Zhen Zhang & Songtao Zhang & Mingshi Yue, 2021. "Joint pricing and replenishment policies for risk‐averse retailers under duopolistic competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1849-1864, October.
    8. Yan, Bo & Wang, Tao & Liu, Yan-ping & Liu, Yang, 2016. "Decision analysis of retailer-dominated dual-channel supply chain considering cost misreporting," International Journal of Production Economics, Elsevier, vol. 178(C), pages 34-41.
    9. Wentao Yi & Zhongwei Feng & Chunqiao Tan & Yuzhong Yang, 2021. "Green Supply Chain Management with Nash Bargaining Loss-Averse Reference Dependence," Mathematics, MDPI, vol. 9(24), pages 1-26, December.
    10. Chi Zhou & Jin Peng & Zhibing Liu & Binwei Dong, 2019. "Optimal incentive contracts under loss aversion and inequity aversion," Fuzzy Optimization and Decision Making, Springer, vol. 18(1), pages 85-102, March.
    11. Hao Zou & Jin Qin & Xiaofeng Long, 2022. "Coordination Decisions for a Low-Carbon Supply Chain Considering Risk Aversion under Carbon Quota Policy," IJERPH, MDPI, vol. 19(5), pages 1-24, February.
    12. Sri Vanamalla Venkataraman & Dereje Asfaw, 2020. "Buyback contract under asymmetric information about retailer’s loss aversion nature," Annals of Operations Research, Springer, vol. 295(1), pages 385-409, December.
    13. Singham, Dashi I. & Cai, Wenbo & Fügenschuh, Armin, 2021. "Flexible contracting with heterogeneous agents and stochastic demand," International Journal of Production Economics, Elsevier, vol. 231(C).
    14. Yan, Nina & Jin, Xuyu & Zhong, Hechen & Xu, Xun, 2020. "Loss-averse retailers’ financial offerings to capital-constrained suppliers: loan vs. investment," International Journal of Production Economics, Elsevier, vol. 227(C).

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