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Reputation compensation for incentive alignment in a supply chain with trade credit under information asymmetry

Author

Listed:
  • Zhihong Wang

    (Donghua University)

  • Lima Zhao

    (Stockholm University)

  • Yuwei Shao

    (The University of Chicago)

  • Xiaojuan Wen

    (Donghua University)

Abstract

This paper examines a two-period dynamic contracting in a supply chain under information asymmetry, where a supplier sells a product to a retailer via a trade credit contract. It is found that the retailer always prefers to conceal her actual cost information thus signal as a higher-cost type in the first period to pursue a higher information rent, which would decrease the supplier’s profit and thereby the overall profit of the supply chain. To mitigate this ratchet effect, we introduce a reputation compensation mechanism in the two-period trade credit setting. This mechanism could alleviate the information asymmetry to a certain extent as there exists a threshold that incentivizes the retailer to share her true cost information in the earlier period. Moreover, the retailer might claim as a lower-cost type when the supplier offers a relatively higher reputation compensation to take full advantage of her information. Therefore, the supplier should provide trade credit with a reasonable reputation compensation in a two-period setting to enhance his expected profit.

Suggested Citation

  • Zhihong Wang & Lima Zhao & Yuwei Shao & Xiaojuan Wen, 2023. "Reputation compensation for incentive alignment in a supply chain with trade credit under information asymmetry," Annals of Operations Research, Springer, vol. 331(1), pages 581-604, December.
    • Handle: RePEc:spr:annopr:v:331:y:2023:i:1:d:10.1007_s10479-023-05478-0
    DOI: 10.1007/s10479-023-05478-0
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