Procurement Contract Design Under Asymmetric Information of Random Yield

Qingkai Ji (), Feng Liu and Jun Zhuang ()
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Qingkai Ji: Management School, Hainan University, 58 Renmin Avenue, Meilan District, Haikou 570228, Hainan, P. R. China
Feng Liu: School of Management Science and Engineering, Key Laboratory of Liaoning Province for Data Analytics and Decision-Making Optimization, Dongbei University of Finance and Economics, 217 Jianshan Street, Shahekou District, Dalian, 116025, Liaoning, P. R. China
Jun Zhuang: Department of Industrial and Systems Engineering, University at Buffalo, the State University of New York, 317 Bell Hall, Buffalo, NY 14260-2050, USA

Asia-Pacific Journal of Operational Research (APJOR), 2024, vol. 41, issue 02, 1-24

Abstract: Unreliable suppliers may pose a substantial threat to supply chains, especially when they hold private information of their reliability. We consider a dyadic supply chain where the information of supplier reliability (in the form of random production yield) is asymmetric. We propose a new mechanism-design model and derive the buyer’s optimal procurement contract menu offered to suppliers with private information. We prove that the contract menu is as simple as offering two different inflated order amounts and setting the procuring price sufficiently low to let the suppliers earn zero reservation profits. These results are derived analytically under uniform distribution. We test them numerically under beta distribution and find them hold as well. However, the informational rent will become positive when the supplier’s reservation profit is positive. Positive informational rent is also found when we consider another structure of the supplier’s production cost. This paper provides some new insights into supply chain management under asymmetric information of uncertain supply.

Keywords: Supply chain contract; random yield; asymmetric information (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S0217595923500161

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