Effects of Revenue-Sharing Contracts and Overconfidence on Innovation for Key Components

Chengli Wei (), Hongzhuan Chen and Yuanfei Kang ()
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Chengli Wei: College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing 211106, China
Hongzhuan Chen: College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing 211106, China
Yuanfei Kang: School of Management, Massey University, Auckland 0632, New Zealand

JRFM, 2023, vol. 16, issue 10, 1-21

Abstract: Revenue-sharing (RS) contracts are a common approach in incentivizing innovation of upstream suppliers by addressing the uneven profit distribution between upstream and downstream firms. Considering the possible overconfidence characterizing decision makers in the supply chain, we investigate the effect of the RS contract and the tendency of overconfidence of supply chain members on the investment in R&D of key components of products in the context of an upstream supplier that is a leader in the R&D and production of key components. We find that regardless of the bargaining power of either party, an RS contract can increase the R&D investment in key components. Regarding the effects of overconfidence of either the downstream manufacturer or upstream supplier, an RS contract can increase the R&D investment in key components. Supplier (manufacturer) overconfidence can harm their own profits but increase the profits of the manufacturer (supplier), and when the level of overconfidence is below a certain threshold, the damage to their own profits is less than the increase in each other’s profits, thus benefiting the whole supply chain. In addition, we also find a joint effect of RS contracts and overconfidence: when the bargaining power of the supplier is low, the RS contract has a certain compensatory effect on the loss of their own profits caused by overconfidence.

Keywords: key components; overconfidence; revenue-sharing; R&D investment (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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