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.     

Consumer Responses to Integrated Risk‐Benefit Information Associated with the Consumption of Food

The risk analysis of the health impact of foods is increasingly focused on integrated risk‐benefit assessment, which will also need to be communicated to consumers. It therefore becomes important to understand how consumers respond to integrated risk‐benefit information. Quality‐adjusted‐life‐years (QALYs) is one measure that can be used to assess the balance between risks and benefits associated with a particular food. The effectiveness of QALYs for communicating both positive and negative health effects associated with food consumption to consumers was examined, using a 3 × 2 experiment varying information about health changes in terms of QALYs associated with the consumption of fish (n = 325). The effect of this information on consumer perceptions of the usefulness of QALYs for describing health effects, on risk and benefit perceptions, attitudes, and intentions to consume fish was examined. Results demonstrated that consumers perceived QALYs as useful for communicating health effects associated with food consumption. QALYs communicated as a net effect were preferred for food products associated with negative net effects on health, while separate communication of both risks and benefits may be preferred for food products associated with positive or zero net health effects. Information about health changes in terms of QALYs facilitated informed decision making by consumers, as indicated by the impact on risk and benefit perceptions as intended by the information. The impact of this information on actual food consumption choices merits further investigation.     

Does Iconicity in Pictographs Matter? The Influence of Iconicity and Numeracy on Information Processing,Decision Making,and Liking in an Eye‐Tracking Study

Researchers recommend the use of pictographs in medical risk communication to improve people's risk comprehension and decision making. However, it is not yet clear whether the iconicity used in pictographs to convey risk information influences individuals’ information processing and comprehension. In an eye‐tracking experiment with participants from the general population (N = 188), we examined whether specific types of pictograph icons influence the processing strategy viewers use to extract numerical information. In addition, we examined the effect of iconicity and numeracy on probability estimation, recall, and icon liking. This experiment used a 2 (iconicity: blocks vs. restroom icons) × 2 (scenario: medical vs. nonmedical) between‐subject design. Numeracy had a significant effect on information processing strategy, but we found no effect of iconicity or scenario. Results indicated that both icon types enabled high and low numerates to use their default way of processing and extracting the gist of the message from the pictorial risk communication format: high numerates counted icons, whereas low numerates used large‐area processing. There was no effect of iconicity in the probability estimation. However, people who saw restroom icons had a higher probability of correctly recalling the exact risk level. Iconicity had no effect on icon liking. Although the effects are small, our findings suggest that person‐like restroom icons in pictographs seem to have some advantages for risk communication. Specifically, in nonpersonalized prevention brochures, person‐like restroom icons may maintain reader motivation for processing the risk information.     

Using a Familiar Risk Comparison Within a Risk Ladder to Improve Risk Understanding by Low Numerates: A Study of Visual Attention

Previous experimental research provides evidence that a familiar risk comparison within a risk ladder is understood by low‐ and high‐numerate individuals. It especially helps low numerates to better evaluate risk. In the present study, an eye tracker was used to capture individuals’ visual attention to a familiar risk comparison, such as the risk associated with smoking. Two parameters of information processing—efficiency and level—were derived from visual attention. A random sample of participants from the general population (N= 68) interpreted a given risk level with the help of the risk ladder. Numeracy was negatively correlated with overall visual attention on the risk ladder (r_s=?0.28, p= 0.01), indicating that the lower the numeracy, the more the time spent looking at the whole risk ladder. Numeracy was positively correlated with the efficiency of processing relevant frequency (r_s= 0.34, p < 0.001) and relevant textual information (r_s= 0.34, p < 0.001), but not with the efficiency of processing relevant comparative information and numerical information. There was a significant negative correlation between numeracy and the level of processing of relevant comparative risk information (r_s=?0.21, p < 0.01), indicating that low numerates processed the comparative risk information more deeply than the high numerates. There was no correlation between numeracy and perceived risk. These results add to previous experimental research, indicating that the smoking risk comparison was crucial for low numerates to evaluate and understand risk. Furthermore, the eye‐tracker method is promising for studying information processing and improving risk communication formats.     

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.     

Weighing the Risks of Nuclear Energy and Climate Change: Trust in Different Information Sources,Perceived Risks,and Willingness to Pay for Alternatives to Nuclear Power

We examined how individuals perceive nuclear energy in the context of climate change mitigation and how their perceptions are associated with trust in different risk information sources. We analyzed the interrelationships between trust, perceived risk of nuclear power, climate change concern, perception of nuclear energy as an acceptable way to mitigate climate change, and willingness to pay (WTP) for alternatives to nuclear power. A nationwide survey (N = 967) collected in Finland was analyzed with structural equation modeling. The associations between trust and perceived risk of nuclear power, climate change concern, and perception of nuclear power as a way to mitigate climate change varied by the type of information source. Political party support and other background variables were associated with trust in different information sources. The effect of trust in information sources on WTP was mediated by perceived risks and benefits. The results will increase our understanding of how individuals perceive nuclear energy as a way to cut CO₂ emissions and the role of trust in different information sources in shaping nuclear risk perceptions and energy choices.     

Value of and Interaction between Production Postponement and Information Sharing Strategies for Supply Chain Firms

We analyze the value of and interaction between production postponement and information sharing, which are two distinct strategies to reduce manufacturers’ uncertainty about demand. In both single‐level and two‐level supply chains, from the manufacturer's perspective, while information sharing is always valuable, production postponement can sometimes be detrimental. Furthermore, the value of production postponement is not merely driven by savings in inventory holding cost as postponement enables the manufacturer to avoid both excess and shortfall in production. We find that production postponement and information sharing strategies may substitute, complement, or conflict with each other, depending on the extent of the increase in the unit production cost when production is postponed. In a two‐level supply chain, from the retailer's perspective, information sharing and production postponement can be beneficial or detrimental. When information sharing is beneficial to the retailer, the retailer always shares her demand information with the manufacturer voluntarily. In addition, this voluntary information sharing is truthful because inflated or deflated demand information hurts the retailer through a higher wholesale price or a stock‐out. However, the retailer never shares her demand information voluntarily if the manufacturer has already adopted production postponement because production postponement and information sharing strategies always conflict with each other. Even when the retailer does not benefit from information sharing, we show that the manufacturer can always design an incentive mechanism to induce the retailer to share the demand information, irrespective of whether the manufacturer has already implemented production postponement or not. The above findings underscore the need for a careful assessment of demand uncertainty‐reduction strategies before the supply chain players embark upon them.     

Toward an Understanding of the Influence of Cultural Background and Domain Experience on the Effects of Risk‐Pricing Formats on Risk Perception

Risk‐information framing can be a powerful tool for aiding the communication of risk and improving decision making. However, little work has investigated the extent that these framing effects depend on the characteristics of the perceiver. In our study, we examine whether the effects of different risk‐pricing formats on risky choices are the same for all individuals, no matter their domain experience or cultural background, or whether there are interactions between these factors. Survey 1 revealed that three risk‐pricing formats of the same choice problem resulted in the same individuals making different risky choices (preference reversal), suggesting that risk perception was distorted by the risk‐pricing format manipulation. In Survey 2, the effects of the risk‐pricing formats were shown to differ by the participants’ cultural background (Asian vs. European) and the extent of their domain experience. The fact that there were no differences between the cultural or domain experience groups in their overall tendency to select riskier (cf. safer) choices indicates that risk behavior differences between groups are often closely linked to perceptual, rather than simply attitudinal, cognitive processes. The results demonstrate the complex, interactive cognitive processes that are used to encode risk information, involving the framing of the information and the cultural background and previous experiences of the individual. We conclude that it is important to consider the characteristics of the individual (e.g., culture, domain experience, etc.) when manipulating risk‐information framing with the aim of improving risk communication.     

A Smooth Model of Decision Making under Ambiguity

We propose and characterize a model of preferences over acts such that the decision maker prefers act f to act g if and only if 𝔼_μφ(𝔼_πu○f) 𝔼_μφ(𝔼_πu○g), where 𝔼 is the expectation operator, u is a von Neumann–Morgenstern utility function, φis an increasing transformation, and μis a subjective probability over the set Πof probability measures πthat the decision maker thinks are relevant given his subjective information. A key feature of our model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. We show that attitudes toward pure risk are characterized by the shape of u, as usual, while attitudes toward ambiguity are characterized by the shape of φ. Ambiguity itself is defined behaviorally and is shown to be characterized by properties of the subjective set of measures Π. One advantage of this model is that the well‐developed machinery for dealing with risk attitudes can be applied as well to ambiguity attitudes. The model is also distinct from many in the literature on ambiguity in that it allows smooth, rather than kinked, indifference curves. This leads to different behavior and improved tractability, while still sharing the main features (e.g., Ellsberg's paradox). The maxmin expected utility model (e.g., Gilboa and Schmeidler (1989)) with a given set of measures may be seen as a limiting case of our model with infinite ambiguity aversion. Two illustrative portfolio choice examples are offered.     

Attitudes,Expectations and Sharing

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Apology . Labour 19:4 801 .
Online publication date: 16‐Dec‐2005. Abstract. We explore the relationship between performance‐related pay and the attitudes and expectations of a representative sample of British workers. Our results suggest that employees who participate in productivity‐linked bonus schemes, discretionary bonus schemes, share ownership or profit sharing are more optimistic about future employment and pay and are generally more satisfied with their work environment. However, employees participating specifically in profit‐sharing schemes are less likely to work as hard as they can, ceteris paribus. This is an intriguing finding, insinuating as it does that group‐sharing schemes are unable to rout the temptation to free ride and thereby ensure a first best cooperative equilibrium.     

More Than Fear Induction: Toward an Understanding of People's Motivation to Be Well‐Prepared for Emergencies in Flood‐Prone Areas

This article examines the extent and manner to which evaluations of flood‐related precautions are affected by an individual's motivation and perception of context. It argues that the relationship between risk perception and flood risk preparedness can be fruitfully specified in terms of vulnerability and efficacy if these concepts are put into the perspective of prevention‐focused motivation. This relationship was empirically examined in a risk communication experiment in a delta area of the Netherlands (n = 1,887). Prevention‐focused motivation was induced by contextualized risk information. The results showed that prevention‐focused individuals were more sensitive to the relevance of potential precautions for satisfying their needs in the context they found themselves in. The needs included, but were not limited to, fear reduction. Due to the heterogeneity of the residents, the evaluations reflected individual differences in the intensity and the selectivity of precautionary processes. Four types of persons could be distinguished according to their evaluation of precautionary measures: a high‐scoring minority, two more selective types, and a low‐scoring minority. For policymakers and risk communicators it is vital to consider the nature of prevention motivation and the context in which it is likely to be high.     

The Bullwhip Effect—Impact of Stochastic Lead Time,Information Quality,and Information Sharing: A Simulation Study

We use a simulation model called ‘SISCO’ to examine the effects in supply chains of stochastic lead times and of information sharing and quality of that information in a periodic order‐up‐to level inventory system. We test the accuracy of the simulation by verifying the results in Chen et al. (2000a) and Dejonckheere et al. (2004). We find that lead‐time variability exacerbates variance amplification in a supply chain, and that information sharing and information quality are highly significant. For example, using the assumptions in Chen et al. (2000a) and Dejonckheere et al. (2004), we find in a numerical experiment of a customer‐retailer‐wholesaler‐distributor‐factory supply chain that variance amplification is attenuated by nearly 50 percent at the factory due to information sharing. Other assumptions we make are based on interviews or conversations with managers at large supply chains.     

How Anxiety Leads to Suboptimal Decisions Under Risky Choice Situations

The current research proposes that situationally activated anxiety—whether incidental or integral—impairs decision making. In particular, we theorize that anxiety drives decisionmakers to more heavily emphasize subjective anecdotal information in their decision making, at the expense of more factual statistical information—a deleterious heuristic called the anecdotal bias. Four studies provide consistent support for this assertion. Studies 1A and 1B feature field experiments that demonstrate the role of incidental anxiety in enhancing the anecdotal bias in a choice context. Study 2 builds on these findings, manipulating individuals’ incidental anxiety and showing how this affects the anecdotal bias in the context of message evaluations. Study 2 also provides direct evidence that only high‐arousal negative emotions such as anxiety/worry enhance the anecdotal bias, not just any negative emotion (e.g., sadness). While the first three studies examine how incidental anxiety impacts choice, the last study demonstrates the effect of integral anxiety on decision making, manipulating anxiety by intensifying participants’ perceived risk. Our results show that—consistent with findings from our first three studies—the anecdotal bias is enhanced when anxiety is heightened by individuals’ perception of risk.     

Insurance,Public Assistance,and Household Flood Risk Reduction: A Comparative Study of Austria,England, and Romania

In light of increasing losses from floods, many researchers and policymakers are looking for ways to encourage flood risk reduction among communities, business, and households. In this study, we investigate risk‐reduction behavior at the household level in three European Union Member States with fundamentally different insurance and compensation schemes. We try to understand if and how insurance and public assistance influence private risk‐reduction behavior. Data were collected using a telephone survey (n = 1,849) of household decisionmakers in flood‐prone areas. We show that insurance overall is positively associated with private risk‐reduction behavior. Warranties, premium discounts, and information provision with respect to risk reduction may be an explanation for this positive relationship in the case of structural measures. Public incentives for risk‐reduction measures by means of financial and in‐kind support, and particularly through the provision of information, are also associated with enhancing risk reduction. In this study, public compensation is not negatively associated with private risk‐reduction behavior. This does not disprove such a relationship, but the negative effect may be mitigated by factors related to respondents' capacity to implement measures or social norms that were not included in the analysis. The data suggest that large‐scale flood protection infrastructure creates a sense of security that is associated with a lower level of preparedness. Across the board there is ample room to improve both public and private policies to provide effective incentives for household‐level risk reduction.     

The Firm as a Means of Concealing Information

The aim of this paper is to demonstrate that a firm may owe its continued existence to its attempts to conceal information from its competitors about the unknown characteristics of a certain factor, not just to its savings on market transaction costs, its team‐working, risk‐sharing, or the encouragement of ex ante specific investment. This is because the existence of a firm contract severs the relationship between the factor market and the product market, thereby making it difficult for outsiders to observe the marginal contribution of the intermediate factor and make statistical inferences about the factor's unknown characteristics. Furthermore, an optimal contract is determined by a trade‐off not only between traditional risk‐sharing and incentive, but also between the incentive and information concealing. Finally, we show that this latter kind of trade‐off also affects the position of the optimal boundary of the firm.     

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.     

Precision of Information,Sensational Information,and Self‐Efficacy Information as Message‐Level Variables Affecting Risk Perceptions

Studies that investigate how the mass media cover risk issues often assume that certain characteristics of content are related to specific risk perceptions and behavioral intentions. However, these relationships have seldom been empirically assessed. This study tests the influence of three message‐level media variables—risk precision information, sensational information, and self‐efficacy information—on perceptions of risk, individual worry, and behavioral intentions toward a pervasive health risk. Results suggest that more precise risk information leads to increased risk perceptions and that the effect of sensational information is moderated by risk precision information. Greater self‐efficacy information is associated with greater intention to change behavior, but none of the variables influence individual worry. The results provide a quantitative understanding of how specific characteristics of informational media content can influence individuals’ responses to health threats of a global and uncertain nature.     

How Safe Is Safe Enough for Self‐Driving Vehicles?

Self‐driving vehicles (SDVs) promise to considerably reduce traffic crashes. One pressing concern facing the public, automakers, and governments is “How safe is safe enough for SDVs?” To answer this question, a new expressed‐preference approach was proposed for the first time to determine the socially acceptable risk of SDVs. In our between‐subject survey (N = 499), we determined the respondents’ risk‐acceptance rate of scenarios with varying traffic‐risk frequencies to examine the logarithmic relationships between the traffic‐risk frequency and risk‐acceptance rate. Logarithmic regression models of SDVs were compared to those of human‐driven vehicles (HDVs); the results showed that SDVs were required to be safer than HDVs. Given the same traffic‐risk‐acceptance rates for SDVs and HDVs, their associated acceptable risk frequencies of SDVs and HDVs were predicted and compared. Two risk‐acceptance criteria emerged: the tolerable risk criterion, which indicates that SDVs should be four to five times as safe as HDVs, and the broadly acceptable risk criterion, which suggests that half of the respondents hoped that the traffic risk of SDVs would be two orders of magnitude lower than the current estimated traffic risk. The approach and these results could provide insights for government regulatory authorities for establishing clear safety requirements for SDVs.     

Communicating Earthquake Preparedness: The Influence of Induced Mood,Perceived Risk,and Gain or Loss Frames on Homeowners’ Attitudes Toward General Precautionary Measures for Earthquakes

Despite global efforts to reduce seismic risk, actual preparedness levels remain universally low. Although earthquake‐resistant building design is the most efficient way to decrease potential losses, its application is not a legal requirement across all earthquake‐prone countries and even if, often not strictly enforced. Risk communication encouraging homeowners to take precautionary measures is therefore an important means to enhance a country's earthquake resilience. Our study illustrates that specific interactions of mood, perceived risk, and frame type significantly affect homeowners’ attitudes toward general precautionary measures for earthquakes. The interdependencies of the variables mood, risk information, and frame type were tested in an experimental 2 × 2 × 2 design (N = 156). Only in combination and not on their own, these variables effectively influence attitudes toward general precautionary measures for earthquakes. The control variables gender, “trait anxiety” index, and alteration of perceived risk adjust the effect. Overall, the group with the strongest attitudes toward general precautionary actions for earthquakes are homeowners with induced negative mood who process high‐risk information and gain‐framed messages. However, the conditions comprising induced negative mood, low‐risk information and loss‐frame and induced positive mood, low‐risk information and gain‐framed messages both also significantly influence homeowners’ attitudes toward general precautionary measures for earthquakes. These results mostly confirm previous findings in the field of health communication. For practitioners, our study emphasizes that carefully compiled communication measures are a powerful means to encourage precautionary attitudes among homeowners, especially for those with an elevated perceived risk.     

Improving the Milk Supply Chain in Developing Countries: Analysis,Insights, and Recommendations

Quality issues in milk—arising primarily from deliberate adulteration by producers—have been reported in several developing countries. In the milk supply chain, a station buys raw milk from a number of producers, mixes the milk and sells it to a firm (that then sells the processed milk to end consumers). We study a non‐cooperative game between a station and a population of producers. Apart from penalties on proven low‐quality producers, two types of incentives are analyzed: confessor rewards for low‐quality producers who confess and quality rewards for producers of high‐quality milk. Contrary to our expectations, whereas (small) confessor rewards can help increase both the quality of milk and the station's profit, quality rewards can be detrimental. We examine two structures based on the ordering of individual and mixed testing of milk: pre‐mixed individual testing (first test a fraction of producers individually and then [possibly] perform a mixed test on the remaining producers) and post‐mixed individual testing (first test the mixed milk from all producers and then test a fraction of producers individually). Whereas pre‐mixed individual testing can be socially harmful, a combination of post‐mixed individual testing and other incentives achieves a desirable outcome: all producers supply high‐quality milk with only one mixed test and no further testing by the station.