Supply contracting and process innovation in a dynamic supply chain with information asymmetry

Jian Ni, Jun Zhao and Lap Keung Chu

European Journal of Operational Research, 2021, vol. 288, issue 2, 552-562

Abstract: We investigate the process innovation and contracting decisions of a dynamic supply chain consisting of a supplier and a manufacturer, with the manufacturer possessing private information about her efficiency of process innovation. To overcome the potential adverse selection problem due to the asymmetric information, the supplier designs a menu of supply contracts that stipulates both the wholesale price and the purchasing quantity. We find that under information asymmetry, the supplier will optimally set a higher wholesale price but a lower purchasing quantity for the manufacturer with high innovation efficiency than that for the manufacturer with low innovation efficiency. As a consequence, the manufacturer with high innovation efficiency will significantly underinvest in innovation due to information asymmetry in addition to the impact of the double marginalization effect. Moreover, although a longer contract period tends to better motivate innovation, it can also magnify the influences of adverse selection on supply chain contracting, leading to a higher wholesale price for the manufacturer with high innovation efficiency.

Keywords: OR in research and development; Supply chain; Process innovation; Wholesale contract; Information asymmetry (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:288:y:2021:i:2:p:552-562

DOI: 10.1016/j.ejor.2020.06.008

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