IT'S WHAT YOU SAY,NOT WHAT YOU PAY: AN EXPERIMENTAL STUDY OF MANAGER‐EMPLOYEE RELATIONSHIPS IN OVERCOMING COORDINATION FAILURE

We study manager‐employee interactions in experiments set in a corporate environment where payoffs depend on employees coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak‐link game. In the absence of managerial intervention subjects invariably slip into coordination failure. To overcome a history of coordination failure, managers have two instruments at their disposal: increasing employees' financial incentives to coordinate and communication with employees. Synthesizing methods drawn from psychology and economics, we quantify the impact of specific types of communication on workers' effort levels and manager's profits. This methodology allows us to rigorously compare the efficacy of communication and direct incentives in an environment where both are available. We find that communication is a more effective tool than incentive changes for leading organizations out of performance traps. Examining the content of managers' communication, the most effective communication strategy is quite simple: specifically request a high effort, point out the mutual benefits of high effort, and imply that employees are being paid well. (JEL: C92, D23, J31, L23, M52)     

Pay‐Back‐Revenue‐Sharing Contract in Coordinating Supply Chains with Random Yield

We consider coordination issues in supply chains where supplier's production process is subject to random yield losses. For a simple supply chain with a single supplier and retailer facing deterministic demand, a pay back contract which has the retailer paying a discount price for the supplier's excess units can provide the right incentive for the supplier to increase his production size and achieve coordination. Building upon this result, we consider coordination issues for two other supply chains: one with competing retailers, the other with stochastic demand. When retailers compete for both demand and supply, they tend to over‐order. We show that a combination of a pay back and revenue sharing mechanism can coordinate the supply chain, with the pay back mechanism correcting the supplier's under‐producing problem and the revenue sharing mechanism correcting the retailers' over‐ordering problem. When demand is stochastic, we consider a modified pay‐back‐revenue‐sharing contract under which the retailer agrees to not only purchase the supplier's excess output (beyond the retailer's order), but also share with the supplier a portion of the revenue made from the sales of the excess output. We show that this contract, by giving the supplier additional incentives in the form of revenue share, can achieve coordination.     

The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information

The theory of global games has shown that coordination games with multiple equilibria may have a unique equilibrium if certain parameters of the payoff function are private information instead of common knowledge. We report the results of an experiment designed to test the predictions of this theory. Comparing sessions with common and private information, we observe only small differences in behavior. For common information, subjects coordinate on threshold strategies that deviate from the global game solution towards the payoff‐dominant equilibrium. For private information, thresholds are closer to the global game solution than for common information. Variations in the payoff function affect behavior as predicted by comparative statics of the global game solution. Predictability of coordination points is about the same for both information conditions.     

The Impact of Costliness,Competitive Importance,and Modularity of Investments on Outsourcing

This study is motivated by examples of outsourcing that are not readily explained by widely established economic theories. We extend recent literature that develops the idea that outsourcing can help firms avoid overinvestment by specifying more precisely the conditions under which this thesis is likely to apply. Our extension is realized through a two‐period game theoretic model in which the outsourcing and in‐house investments are driven by (1) the cost required to develop a product or process module, (2) competitive relevance, defined as the module's share in the production cost or the module's importance to the customer, and (3) modularity, defined as the extent to which generic investments in the module can approach firm‐specific investments in terms of the overall product/process performance. The analysis generates predictions about what types of insourcing, outsourcing, and non‐sourcing behaviors are likely to emerge in different parts of the parameter space. Outsourcing to a more concentrated industry upstream emerges at equilibrium when modularity is high, relevance low to medium, and development cost high enough that none or only a subset of focal firms wants to invest. While firms are forced to insource and overinvest due to a prisoner's dilemma when the development cost is sufficiently high relative to the module's relevance, we do not find outsourcing equilibria that solve this problem in a two‐period game with no commitment. This result implies that some form of tacit coordination in a multi‐period game may be necessary. We conclude the study with a discussion of empirical implications.     

Uncertainty about Uncertainty and Delay in Bargaining

We study a one‐sided offers bargaining game in which the buyer has private information about the value of the object and the seller has private information about his beliefs about the buyer's valuation. We show that this uncertainty about uncertainties dramatically changes the set of outcomes. In particular, second order beliefs can lead to a delay in reaching agreement even when the seller makes frequent offers. We show that not all types of second order beliefs lead to a delay. When the buyer assigns positive probability to the seller knowing the buyer's value, then delay not only can occur, but it must occur for a class of equilibria. However, in all other cases delay will never occur.     

LYING ABOUT WHAT YOU KNOW OR ABOUT WHAT YOU DO?

We compare communication about private information to communication about actions in a one‐shot 2‐person public good game with private information. The informed player, who knows the exact return from contributing and whose contribution is unobserved, can send a message about the return or her contribution. Theoretically, messages can elicit the uninformed player's contribution, and allow the informed player to free‐ride. The exact language used is not expected to matter. Experimentally, however, we find that free‐ride depends on the language: the informed player free‐rides less—and thereby lies less frequently—when she talks about her contribution than when she talks about the return. Further experimental evidence indicates that it is the promise component in messages about the contribution that leads to less free‐ride and less lying.     

Optimal Quantity Discount Design with Limited Information Sharing*

In this article we address the optimal quantity discount design problem of a supplier in a two‐stage supply chain where the supplier and the buyer share annual demand information only. The supply chain faces a constant deterministic demand that is not price sensitive and operates with fixed setup costs in both stages. We show that the supplier can actually moderate a cost‐minimizing buyer to order in quantities different than the buyer's optimal order quantity in the traditional setting and develop a multi‐breakpoint quantity discount scheme that maximizes supplier's expected net savings. The proposed multi‐breakpoint discount scheme can be easily computed from the available information and, while also maximizing the supplier's net savings, is very effective in achieving high levels of supply chain coordination efficiency in the presence of limited information.     

The Impact of Information Sharing on Supply Chain Performance under Asymmetric Information

The use of screening contracts is a common approach to solve supply chain coordination problems under asymmetric information. One main assumption in this context is that managers without specific incentives would rather use their private information strategically than reveal it truthfully. This harms supply chain performance. This study investigates the impact of information sharing in a principal‐agent setting that is typical for many supply chain transactions. We conduct a laboratory experiment to test whether information sharing has an influence on supply chain coordination. We find that information sharing within the supply chain has two positive effects. First, information sharing reduces the inefficiencies resulting from information deficits if there is a certain amount of trust in the supply chain. Second, communication can limit out‐of‐equilibrium behavior with a small impact on the firm's own payoff, but a large impact on the supply chain partner. Furthermore, we find that both effects are amplified when communication takes place in an environment that allows the less informed supply chain party to punish or to reward the better informed party. Although our extended mechanisms substantially enhance the poor performance of the theoretically optimal coordination contract menu, we find no mechanism that implements supply chain performance superior to the theoretically predicted second‐best level.     

Managing High‐Tech Capacity Expansion via Reservation Contracts

We study capacity reservation contracts between a high‐tech manufacturer (supplier) and her OEM customer (buyer). The supplier and the buyer are partners who enter a ‘design‐win” agreement to develop the product, and who share the stochastic demand information. To encourage the supplier for more aggressive capacity expansion, the buyer reserves capacity upfront by paying a deductible fee. As capacity expansion demonstrates diseconomy of scale in this context, we assume convex capacity costs. We show that as the buyer's revenue margin decreases, the supplier faces a sequence of four profit scenarios with decreasing desirability. We examine the effects of market size and demand variability to the contract conditions. We propose two channel coordination contracts, and discuss how such contracts can be tailored for situations where the supplier has the option of not complying with the contract, and when the buyer's demand information is only partially updated during the supplier's capacity lead‐time.     

Value of Persistent Information

We develop a theory of how the value of an agent's information advantage depends on the persistence of information. We focus on strategic situations with strict conflict of interest, formalized as stochastic zero‐sum games where only one of the players observes the state that evolves according to a Markov operator. Operator Q is said to be better for the informed player than operator P if the value of the game under Q is higher than under P regardless of the stage game. We show that this defines a convex partial order on the space of ergodic Markov operators. Our main result is a full characterization of this partial order, intepretable as an ordinal notion of persistence relevant for games. The analysis relies on a novel characterization of the value of a stochastic game with incomplete information.     

PRODUCT OFFERING,PRICING, AND MAKE‐TO‐STOCK/MAKE‐TO‐ORDER DECISIONS WITH SHARED CAPACITY

In an era of mass customization, many firms continue to expand their product lines to remain competitive. These broader product lines may help to increase market share and may allow higher prices to be charged, but they also cause challenges associated with diseconomies of scope. To investigate this tradeoff, we considered a monopolist who faces demand curves, which for each of its potential products, decline with both price and response time (time to deliver the product). The firm must decide which products to offer, how to price them, whether each should be make‐to‐stock (mts) or make‐to‐order (mto), and how often to produce them. The offered products share a single manufacturing facility. Setup times introduce disceonomies of scope and setup costs introduce economies of scale. We provide motivating problem scenarios, model the monopolist's problem as a non‐linear, integer programming problem, characterize of the optimal policy, develop near‐optimal procedures, and discuss managerial insights.     

The Economic Value of Market Information for Farmers in Developing Economies

In developing countries, farmers lack information for making informed production, manufacturing/selling decisions to improve their earnings. To alleviate poverty, various non‐governmental organizations (NGOs) and for‐profit companies have developed different ways to distribute information about market price, crop advisory and farming technique to farmers. We investigate a fundamental question: will information create economic value for farmers? We construct a stylized model in which farmers face an uncertain market price (demand) and must make production decisions before the market price is realized. Each farmer has an imprecise private signal and an imprecise public signal to estimate the actual market price. By examining the equilibrium outcomes associated with a Cournot competition game, we show that private signals do create value by improving farmers' welfare. However, this value deteriorates as the public signal becomes available (or more precise). In contrast, in the presence of private signals, the public signal does not always create value for the farmers. Nevertheless, both private and public signals will reduce price variation. We also consider two separate extensions that involve non‐identical private signal precisions and farmers' risk‐aversion, and we find that the same results continue to hold. More importantly, we find that the public signal can reduce welfare inequality when farmers have non‐identical private signal precisions. Also, risk‐aversion can dampen the value created by private or public information.     

Acquisition and Disclosure of Operational Information*

We study a firm's strategy for acquisition and disclosure of operational information by establishing linkages among information quality, managerial self‐interest, and production planning. We develop a multistage model in which a manager of a publicly traded firm first receives private information about the product demand and then uses it to make production and disclosure decisions. We consider two prevalent disclosure models employed in the accounting literature: all‐or‐nothing and cheap‐talk models. In the all‐or‐nothing model, it is assumed that any disclosure must be truthful, but the manager can strategically withhold information. We show that the manager commits to acquire the value‐added operational information if (i) the managerial self‐interest in the interim share price is low or (ii) the managerial self‐interest in the interim share price is high, but the fixed disclosure cost is either sufficiently low or sufficiently high. We demonstrate that the firm is better off if the production level is observable to the financial market because multidimensional signaling reduces costs. In the cheap‐talk model, we assume that the manager's disclosure may not be truthful. We show that the manager's incentive to acquire value‐added operational information increases along with the penalty cost for misleading investors. Therefore, a high penalty cost for misleading investors can encourage the manager to obtain more precise information, which in turn improves the firm's cash flow.     

COMMUNICATION,COORDINATION, AND NETWORKS

We study experimentally the role of the network structure of pre‐play communication in determination of outcome and behavior in a multiplayer coordination game with conflicting preferences. We explore the trade‐off between the efficiency and equity of coordination outcomes and its link to the network structure of communication. Our results show substantial variations in both efficiency and equity of coordination outcomes across networks. While, as expected, increasing the length of communication improves the chance of successful coordination, it also reduces the asymmetry in the distribution of coordinated outcomes. We identify behaviors that explain variations in the distribution of coordinated outcomes both within and across networks. In all treatments, coordination is mostly explained by convergence in communication.     

Channel Strategies for Durable Goods: Coexistence of Selling and Leasing to Individual and Corporate Consumers

In durable goods markets, such as those for automobiles or computers, the coexistence of selling and leasing is common as is the existence of both corporate and individual consumers. Leases to corporate consumers affect the price of used goods on the second‐hand market which in turn affect the buying and leasing behavior of individual consumers. The setting of prices (or volumes) for sale and lease to individual and corporate consumers is a complicated problem for manufacturers. We consider a manufacturer who concurrently sells and leases a finitely durable good to both individual and corporate consumers. The interaction between the manufacturer and consumers is modeled as a dynamic sequential game, where each player seeks to maximize its own payoff over an infinite horizon. We study how the corporate channel substitutability of new goods and used goods and transaction costs in the second‐hand market affect the manufacturer's pricing decisions, consumer behavior, and social welfare in the retail market. Making a number of simplifying assumptions, including two‐period lifetime for the finitely durable goods, we consider Markov Perfect Equilibrium as the solution concept. We show that the manufacturer can maximize her profit by segmenting consumers according to their willingness to pay. Selling and leasing are the mechanisms used for price discrimination in the retail market. We show that as she leases a larger share of her production to the corporate consumer, (1) the manufacturer does not necessarily have to adjust the optimal selling price of new goods to individual consumers, and the volume of sales of new goods to individual consumers can stay the same; (2) the manufacturer does increase the retail lease price, and the number of individual leases decreases; (3) the net supply of used goods on the market increases, leading to a lower market price for used goods; and (4) more individual consumers are able to participate in the market, and their collective welfare or net utility improves. We also show that as production costs increase the manufacturer increases prices, reducing volumes across all channels. When transaction costs increase, the manufacturer reduces leasing in both corporate and retail channels.     

Leadership,information, and risk attitude: A game theoretic approach

This paper experimentally investigates how risk attitudes mitigate leadership effectiveness in a collective setting with projects that exhibit both free riding and coordination problems. We take two novel approaches: 1) the introduction of economic game theory to psychological studies of leadership, and 2) the application of the leadership ontology of Drath et al. (2008) as a cross-disciplinary integrative framework. Leadership here is focused on the presence or absence of direction, alignment, and commitment as well as antecedent beliefs and practices that are held within a collective (for us, our experimental participants). Our leadership context is stripped down to very minimal conditions: three group members, an investment decision, and the introduction of information regarding group members' attitudes toward risk. We find that the mere mention of risk attitude (whether risky or risk averse) undermines leadership effectiveness in mitigating free riding for our 420 experimental participants. Our study's primary implications lie in the application of game theory methodology to the psychological study of leadership, the introduction of relevant individual difference constructs to economic studies of leadership, and the advocation of the Drath et al. (2008) framework as a helpful integrative mechanism for interdisciplinary leadership research.     

Communication With Unknown Perspectives

Consider a group of individuals with unobservable perspectives (subjective prior beliefs) about a sequence of states. In each period, each individual receives private information about the current state and forms an opinion (a posterior belief). She also chooses a target individual and observes the target's opinion. This choice involves a trade‐off between well‐informed targets, whose signals are precise, and well‐understood targets, whose perspectives are well known. Opinions are informative about the target's perspective, so observed individuals become better understood over time. We identify a simple condition under which long‐run behavior is history independent. When this fails, each individual restricts attention to a small set of experts and observes the most informed among these. A broad range of observational patterns can arise with positive probability, including opinion leadership and information segregation. In an application to areas of expertise, we show how these mechanisms generate own field bias and large field dominance.     

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.     

Fear of Miscoordination and the Robustness of Cooperation in Dynamic Global Games With Exit

This paper develops a framework to assess how fear of miscoordination affects the sustainability of cooperation. Building on theoretical insights from Carlsson and van Damme (1993), it explores the effect of small amounts of private information on a class of dynamic cooperation games with exit. Lack of common knowledge leads players to second guess each other's behavior and makes coordination difficult. This restricts the range of equilibria and highlights the role of miscoordination payoffs in determining whether cooperation is sustainable or not. The paper characterizes the range of perfect Bayesian equilibria as the players' information becomes arbitrarily precise. Unlike in one‐shot two‐by‐two games, the global games information structure does not yield equilibrium uniqueness.     

预测信息分享对制造商开通直销渠道的影响

研究了零售商预测信息分享对制造商渠道结构选择的影响.运用不完全信息动态博弈分别建立了单渠道和双渠道供应链决策模型,得到了贝叶斯均衡的渠道价格和各方最优期望利润.研究发现当零售商的需求预测精度比较低时,制造商应当开通直销渠道.零售商没有动机将预测信息与制造商分享.设计了一个信息分享补偿机制使得零售商能自愿分享其私有信息.在信息分享补偿机制下,虽然制造商为获取零售商预测信息付出了成本,但是依然有动机开通直销渠道.