Download or read book Asymmetric Cost Information and Enforcement in Supply Contract Design written by Ehsan Bolandifar and published by . This book was released on 2015 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies a supply contracting problem where a buyer sources a product from a supplier to satisfy uncertain market demand. With the increasing length and complexity of today's global supply chains, the buyer may face two issues when designing the supply contract: adverse selection (i.e., the supplier's cost structure is private information) and lack of enforcement (i.e., the supplier's capacity investment is not enforceable). We derive the buyer's optimal contracting strategies and analyze their properties. We find that although the buyer's optimal mechanism is generally complex, it may reduce to a two-part tariff under certain conditions (i.e., a single, linear contract could be optimal for the buyer). Even when the two-part tariff is suboptimal, it performs nearly as well as the optimal mechanism for a wide range of situations. These findings indicate that the value of achieving enforceability and the value of using complex menu are negligible in such a supply chain setting. Therefore, our research demonstrates that the two-part tariff is an attractive option for buyers whose goal is to ensure supply while facing both cost uncertainty and enforcement issues. It also provides a new explanation for the prevalence of such simple contracts in practice.