Long‐Term Contracting: The Role of Private Information in Dynamic Supply Risk Management

We examine the critical role of evolving private information in managing supply risk. The problem features a dyadic channel where a dominant buyer operates a multiperiod inventory system with lost sales and fixed cost. He replenishes from a supplier, whose private state of production is vulnerable to random shocks and evolves dynamically over time. We characterize the optimal inventory policy with a simple semi‐stationary structure; it distorts order quantity for limiting information rent only in the initial period; the optimal payment compensates for production cost in every period but concedes real information rent only in the initial period. These properties allow us to derive an easy‐to‐implement revenue‐sharing contract that facilitates ex ante strategic planning and ex post dynamic execution. This work advances our understanding on when and how to use private information in dynamic risk management.     

Managing Risk of Supply Disruptions: Incentives for Capacity Restoration

A supplier facing the prospect of disruption has to decide whether or not to invest in restoration capability. With restoration capability, if disruption occurs, additional costly effort can be exerted to rebuild capacity, although its outcome is uncertain. We study how a firm (buyer) can use incentive mechanisms to motivate a supplier's investment in capacity restoration, and compare this approach with the traditional approach of diversifying part of the order to an expensive but reliable supplier. Under a Restoration Enhancement (RE) strategy, the buyer uses price and/or order quantity incentives to encourage the supplier's restoration investment decision. Two different cases are considered—when the incentive is committed to ex ante (prior to disruption) and when it is committed to ex post (after disruption). In contrast, under a Supplier Diversification (SD) strategy, the buyer splits orders between a reliable supplier and an unreliable supplier to hedge against the disruption risk. Here, the buyer does not provide any separate incentive to the unreliable supplier. Our analysis indicates that under the RE strategy, where the buyer offers incentives, both the buyer and the supplier (weakly) prefer the ex ante commitment over the ex post one. Furthermore, the RE strategy is preferred over the SD strategy when the unreliable supplier's restoration outcome is more predictable or when a high restoration outcome is more likely. However, the buyer's preference for the SD strategy increases as market demand increases.     

Policy Incentives for Dangerous (But Necessary) Operations

In industries where firms perform dangerous (but necessary) operations, liability costs—due to potential harm to third parties—can be significant. Firms may therefore find it optimal to exit the market, and this may lead to an inefficiently low number of incumbents. A social planner can discourage exit by offering appropriately designed subsidies. Ex ante subsidies defray the costs associated with making operations safer (e.g., funds to subsidize the purchase of safety equipment). Ex post subsidies mitigate the financial damages caused by an accident (e.g., funds to defray the cost of cleaning up a toxic spill). We consider a model where (i) firms have private information about their ability to improve reliability and (ii) reliability investments are unobservable. We demonstrate that when the social value of reliability outweighs the benefit of increased competition, it is optimal to offer ex ante subsidies alone (i.e., to subsidize the cost of making operations safer). Conversely, when the benefits of competition outweigh the benefits of reliability, a combination of ex ante and ex post subsidies is optimal (i.e., not only to subsidize safer operations, but also to share the costs of a potential accident).     

Impulse Balance and Multiple‐Period Feedback in the Newsvendor Game

Human subjects in the newsvendor game place suboptimal orders: orders are typically between the expected profit‐maximizing quantity and mean demand (“pull‐to‐center bias”). In previous work, we have shown that impulse balance equilibrium (IBE), which is based on a simple ex post rationality principle along with an equilibrium condition, can predict ordering decisions in the laboratory. In this study, we extend IBE to standing orders and multiple‐period feedback and show that it predicts—in line with previous findings—that constraining newsvendors to make a standing order for a sequence of periods moves the average of submitted orders toward the optimum.     

Information Acquisition and Voluntary Disclosure in an Export‐Processing System

We study a strategic information management problem in the export‐processing trade, where the buyer controls the raw material input and sales and the producer is responsible for production. The production is vulnerable to random yield risk. The producer can exert a costly effort to acquire the private yield rate information and discretionarily share it with the buyer. We develop a sequential Bayesian game model that captures three key features of the system—endogenous information endowment, voluntary disclosure, and ex post information sharing—a significant departure from the literature. The optimal disclosure strategy is driven by the trade‐off between the gains from Pareto efficiency improvement and self‐interested overproduction. It is specified by two thresholds on yield rate: only the middle‐yield producers (with yield rate between these two thresholds) share private information to improve supply‐demand match; the low‐ and high‐yield producers withhold information to extract excess input from the buyer. The buyer in response penalizes nondisclosure with reduced input and rewards information sharing with a larger order. This strategic interaction is further exacerbated by the double marginalization effect from decentralization, resulting in severe efficiency loss. We examine the effectiveness of three corrective mechanisms—vertical integration, mandatory disclosure, and production restriction—and reveal the costs of information suppressive effect and overinvestment incentive and the benefit from concessions on the processing fee. Our study endogenizes the asymmetric supply risk and provides the first attempt to rationalize the strategic interactions of informational and operational incentives in the export‐processing system.     

Advance Selling in the Presence of Speculators and Forward‐Looking Consumers

This article examines the pricing policy of a monopolist seller who may sell in advance of consumption in a market that comprises of myopic consumers, forward‐looking consumers, and speculators. The latter group has no consumption value for the goods and is in the market with the sole objective of making a profit by reselling the purchased goods shortly after. Consumers, although homogeneous in terms of their valuations, are different with respect to their perspectives. We show that in an “upward” market where the expected valuation increases over time, the optimal pricing policy is an ex ante “static” one where the seller “prices into the future” and prices the myopic consumers out of the advance market. However, in a “downward” market where the expected valuation decreases over time, the seller adopts a dynamic pricing strategy except for the case when higher initial sales can trigger more demand subsequently and when the downward trend is not too high. In this case, the seller prefers an ex ante “static” pricing strategy and deliberately prices lower initially to sell to speculators. We identify the conditions under which the seller benefits from the existence of speculators in the market. Moreover, although the presence of entry costs is ineffective as an entry deterrence, we determine the conditions under which exit costs can rein in speculative purchase.     

An accounting control system structured on multiple objective planning models

An important problem confronting decision makers in modern organizations is how to plan and control in a multiple goal decision setting. The usual approach for attacking this problem is to assume one dominant goal and treat others as constraints for the budget planning purpose. The traditional accounting control system is a variance analysis which makes a comparison between an ex ante planning budget, a budget adjusted to the actual activity level, and actual results. The present paper describes how to set up multiple goal planning models by using goal programming and multiple objective linear programming techniques. And an opportunity cost concept of ex post accounting variance analysis (which a comparison is made between an ex ante budget, ex post optimum budget, and actual results) is used as a control device. This ex post analysis will signal a deviation in any data input parameter in the planning models.     

Can Environmental Insurance Succeed Where Other Strategies Fail? The Case of Underground Storage Tanks

Private risk reduction will be socially efficient only when firms are liable for all the damage that they cause. We find that environmental insurance can achieve social efficiency even when two traditional policy instruments—ex post fines and risk management mandates with ex ante fines—do not. Inefficiency occurs with ex post fines, when small firms declare bankruptcy and escape their liabilities, limiting the incentives from this policy tool. Firms ignore mandates to implement efficient risk management because regulatory agencies do not have sufficient resources to monitor every firm. The evolution of the U.S. Environmental Protection Agency's and states’ underground storage tank programs suggests that mandating environmental insurance can address inefficiency due to small firms declaring bankruptcy. Comparing insurance mandates to risk management mandates, the burden on a regulator is lower if all it has to do is to confirm that the firm has insurance rather than that the firm has actually, and effectively, implemented required management practices. For underground storage tanks, we show that insurance lowered toxic releases.     

Measuring the Performance of Corporate Acquisitions: An Empirical Comparison of Alternative Metrics*

The choice of performance measure has long been a difficult issue facing researchers. This article investigates the comparability of four common measures of acquisition performance: cumulative abnormal returns, managers' assessments, divestment data and expert informants' assessments. Independently each of these measures indicated a mean acquisition success rate of between 44–56%, within a sample of British cross‐border acquisitions. However, with the exception of a positive relationship between managers' and expert informants' subjective assessments, no significant correlation was found between the performance data generated by the alternative metrics. In particular, ex‐ante capital market reactions to an acquisition announcement exhibited little relation to corporate managers' ex‐post assessment. This is seen to reflect the information asymmetry that can exist between investors and company management, particularly regarding implementation aspects. Overall, the results suggest that future acquisitions studies should consider employing multiple performance measures in order to gain a holistic view of outcome, while in the longer term, opportunities remain to identify and refine improved metrics.     

The Newsvendor Problem and Price‐Only Contract When Bankruptcy Costs Exist

We study a supply chain of a supplier selling via a wholesale price contract to a financially constrained retailer who faces stochastic demand. The retailer might need to borrow money from a bank to execute his order. The bank offers a fairly priced loan for relevant risks. Failure of loan repayment leads to a costly bankruptcy (fixed administrative costs, costs proportional to sales, and a depressed collateral value). We identify the retailer's optimal order quantity as a function of the wholesale price and his total wealth (working capital and collateral). The analysis of the supplier's optimal wholesale price problem as a Stackelberg game, with the supplier the leader and the retailer the follower, leads to unique equilibrium solutions in wholesale price and order quantity, with the equilibrium order quantity smaller than the traditional newsvendor one. Furthermore, in the presence of the retailer's bankruptcy risks, increases in the retailer's wealth lead to increased supplier's wholesale prices, but without the retailer's bankruptcy risks the supplier's wholesale prices stay the same or decrease in retailer's wealth.     

基于预期的报童问题研究

Koszegi与Rabin认为参照点往往由决策者的理性预期确定，本文选取报童的预期作为参照点，利用参照依赖偏好理论对报童问题进行了研究。研究发现，基于预期的报童的最优订货量不仅与货物销售的概率分布、价格等有关还与报童的损失厌恶程度有关。如果报童是损失厌恶的，报童的订货量要小于经典报童问题的订货量；反之，报童的订货量则大于经典报童问题的订货量，该结论与大部分实证结果是一致的。最后，用算例来验证了文中有关结论的正确性。     

ISO 9000—a marketing tool for U.S. agribusiness

The relevance of the ISO 9000 series of quality management systems (QMS) for U.S. agribusiness is analyzed. Certified firms from several industries were surveyed to determine their before (ex ante) and after (ex post) perspectives of the QMS. Results for the agribusiness subsample are compared to those for firms from other industries to determine if they behave differently. Anticipated marketing advantages (increasing market share and providing access to new markets) of the QMS were critical factors that encouraged the pursuit of the certificate. The average cost to attain certification was $101.400 and to maintain certification was an additional $26,500 per year.     

Obtaining Informationally Consistent Decisions When Computing Costs with Limited Information

We demonstrate the need to view in a dynamic context any decision based on limited information. We focus on the use of product costs in selecting the product portfolio. We show how ex post data regarding the actual costs from implementing the decision leads to updating of product cost estimates and potentially trigger a revision of the initial decision. We model this updating process as a discrete dynamical system (DDS). We define a decision as informationally consistent if it is a fixed‐point solution to the DDS. We employ numerical analysis to characterize the existence and properties of such solutions. We find that fixed points are rare, but that simple heuristics find them often and quickly. We demonstrate the usefulness and robustness of our methodology by examining the interaction of limited information with multiple decision rules (heuristics) and problem features (size of product portfolio, profitability of product markets). We discuss implications for research on cost systems.     

Shareholder Value Effects of Voluntary Emissions Reduction

The relationship between emissions reduction and firm financial performance has been studied with mixed results. We consider potential sources of this ambiguity by examining announcements of voluntary emissions reduction (VER) from 1990 to 2009. We measure the stock market reaction associated with VER announcements to estimate the effects of time, emissions type, and whether the reduction was announced ex ante or ex post. We find that the market reaction to VER significantly decreased over time. The changing nature of the market reaction to VER over time highlights the importance of evaluating the financial impact of any VER in the current context rather than relying on past findings. We also find that the market reaction is more positive if the reduction is for greenhouse gas (GHG) rather than other emissions types. In light of the increasing concern with GHGs, this finding should be welcome news for managers. Last, we find a more positive market reaction for VER announcements that are pledges or statements of intent rather than realized achievements of VER. Managers contemplating VER might find benefit (and at least no harm) in announcing their intent to reduce emissions rather than waiting until they have achieved the reduction.     

Committed Versus Contingent Pricing Under Competition

Should capacitated firms set prices responsively to uncertain market conditions in a competitive environment? We study a duopoly selling differentiated substitutable products with fixed capacities under demand uncertainty, where firms can either commit to a fixed price ex ante, or elect to price contingently ex post, e.g., to charge high prices in booming markets, and low prices in slack markets. Interestingly, we analytically show that even for completely symmetric model primitives, asymmetric equilibria of strategic pricing decisions may arise, in which one firm commits statically and the other firm prices contingently; in this case, there also exists a unique mixed strategy equilibrium. Such equilibrium behavior tends to emerge, when capacity is ampler, and products are less differentiated or demand uncertainty is lower. With asymmetric fixed capacities, if demand uncertainty is low, a unique asymmetric equilibrium emerges, in which the firm with more capacity chooses committed pricing and the firm with less capacity chooses contingent pricing. We identify two countervailing profit effects of contingent pricing under competition: gains from responsively charging high price under high demand, and losses from intensified price competition under low demand. It is the latter detrimental effect that may prevent both firms from choosing a contingent pricing strategy in equilibrium. We show that the insights remain valid when capacity decisions are endogenized. We caution that responsive price changes under aggressive competition of less differentiated products can result in profit‐killing discounting.     

On the benefits of operational flexibility in a distribution network with transshipment

We consider a centralized distribution network with multiple retailers who receive replenishment inventory to satisfy customer demand of the local markets. The operational flexibility of the network is defined as the opportunity that one retailer's excess inventory can be transferred to satisfy other retailers’ unmet customer demand due to stock-outs. A general modeling framework is developed to optimize retailers’ order quantities under any possible flexibility level of a stylized two-stage distribution network. We apply the framework to formulate and solve the transshipment problem of a distribution network with three retailers. Six typical flexibility levels are investigated to make the comparison study on the firm's profit performance under three ordering quantity policies: average demand, newsvendor order quantity, and optimal order quantity. We find that the operational flexibility and system optimization are complements to the firm's performance. The ordering policy with newsvendor ordering quantity can perform fairly well with moderate flexibility level when compared with the optimized ordering policy with full flexibility.     

Strategic Information Sharing in Competing Channels

We investigate strategic information sharing in two competing channels. The retailer in a channel can ex post decide whether to share private demand information with his upstream manufacturer after the content of information becomes known. We find that a retailer discloses low demand and withholds high demand to induce lower wholesale prices from his manufacturer. We show that a retailer should share less information when the retail market becomes more competitive, but should disclose more information when his capability to acquire information improves. When a decentralized supply chain competes with an integrated channel, we show that firms in the supply chain benefit from the rival channel's effort to improve information capability, that the incentive for the retailer in the supply chain to improve his information capability increases with the intensity of competition and with the rival channel's information capability, and that the retailer may not want to pursue perfect information acquisition even when doing so is costless. Extensive numerical studies demonstrate that similar results also hold for two decentralized supply chains competing with each other.     

Supplier Encroachment as an Enhancement or a Hindrance to Nonlinear Pricing

The objective of this study was to extend existing understanding of supplier encroachment to contexts in which there is information asymmetry and the supplier can use nonlinear pricing. Prior research has shown that supplier encroachment can mitigate double marginalization and thus benefit both the supplier and the reseller. However, under symmetric information, this benefit disappears if the supplier can use nonlinear pricing. In our model, the reseller observes the true market size while the supplier knows only the prior distribution, that is, a seemingly ideal setting for implementing mechanism design through nonlinear pricing. We first show that, because encroachment capability enables the supplier to make an ex post output decision, it fundamentally alters the structure of the optimal nonlinear pricing policy. In addition to the usual downward distortion effect, where the reseller may purchase less than the efficient quantity, we also have the possibility for upward distortion. Thus, under asymmetric information and nonlinear pricing, supplier encroachment has two opposing effects. On one hand, the ability to shift sales to the direct channel allows the supplier to reduce information rents with less sacrifice of efficiency; but on the other hand, by introducing the possibility of her own opportunistic behavior, it can result in upward distortion of the quantities sold through the reselling channel, which is a new source of inefficiency. Depending upon the relative efficiency of the reselling channel and the demand distribution, either of these two effects may dominate and the supplier's ability to encroach may either benefit or hurt both the supplier and the reseller.     

Evaluation of Legal Liability for Technological Risks in View of Requirements for Peaceful Coexistence and Progress

Legal liability for risk‐generating technological activities is evaluated in view of requirements that are necessary for peaceful human coexistence and progress in order to show possibilities for improvement. The requirements imply, given that political decision making about the activities proceeds on the basis of majority rule, that legal liability should be unconditional (absolute, strict) and unlimited (full). We analyze actual liability in international law for various risk‐generating technological activities, to conclude that nowhere is the standard of unconditional and unlimited liability fully met. Apart from that there are enormous differences. Although significant international liability legislation is in place for some risk‐generating technological activities, legislation is virtually absent for others. We discuss fundamental possibilities and limitations of liability and private insurance to secure credible and ethically sound risk assessment and risk management practices. The limitations stem from problems of establishing a causal link between an activity and a harm; compensating irreparable harm; financial warranty; moral hazard in insurance and in organizations; and discounting future damage to present value. As our requirements call for prior agreement among all who are subjected to the risks of an activity about the settlement of these difficult problems, precautionary ex ante regulation of risk‐generating activities may be a more attractive option, either combined with liability stipulations or not. However, if ex ante regulation is not based on the consent of all subjected to the risks, it remains that the basis of liability in the law should be unconditional and unlimited liability.     

Route vs. Segment: An Experiment on Real‐Time Travel Information in Congestible Networks

We report the results of an experimental study of route choice in congestible networks with a common origin and common destination. In one condition, in each round of play network users independently committed themselves at the origin to a three‐segment route; in the other condition, they chose route segments sequentially at each network junction upon receiving en route information. At the end of each round, players received ex‐post complete information about the distribution of the route choices. Although the complexity of the network defies analysis by common users, traffic patterns in both conditions converged rapidly to the equilibrium solution. We account for the observed results by a Markov adaptive learning model postulating regret minimization and inertia. We find that subjects' learning behavior was similar across conditions, except that they exhibited more inertia in the condition with en route information.