An Experimental Investigation of Pull Contracts in Supply Chains

In this study, I investigate supply chain contracts in a setting where a supplier uses its inventory to directly satisfy a retailer's demand. These “pull” contracts have increased in popularity in practice but have not been studied experimentally. In a controlled laboratory setting, I evaluate a wholesale price contract and two coordinating contracts. The data suggest that the benefit of the two coordinating contracts over the wholesale price contract is less than the standard theory predicts, and that retailers, in the two coordinating contracts, exhibit a systematic bias of setting the coordinating parameter too low, and the wholesale price too high, relative to the normative benchmarks. In an effort to explain this deviation, I explore three behavioral models and find that loss aversion and reference dependence fit the data well. I empirically test this result in a follow‐up experiment, which directly controls for loss aversion and reference dependence, and observe that retailers make significantly better decisions. Lastly, I administer a number of experiments which reduce the complexity of the problem, curtail the amount of risk, and increase the level of decision support, and find that none improve decisions relative to the treatment that controls for loss aversion and reference dependence.     

风险投资合约及治理机制实证研究综述

风险投资合约及治理机制是现代金融合约理论重要和新兴的研究领域.面对创业项目的高风险性,风险投资家通过复杂的合约订立和阶段性的资金投入,融合与创业者的代理冲突.重点评述了国内外风险投资合约及其治理机制的相关实证研究成果,指出了未来的理论和实证研究方向.     

Willingness to Pay for Shifting Inventory Risk: The Role of Contractual Form

In order to reduce their inventory risk, firms can attempt to contract with their suppliers for shorter supply lead‐times, with their buyers for longer demand lead‐times, or both. We designed a controlled laboratory experiment to study contracts that shift a focal firm's inventory risk to its supply chain partners and address two questions. First, is it more effective if the cost of shifting inventory risk is framed as a fixed fee or in per‐unit cost terms? We find that, generally, our participants are willing to pay more to avoid supply–demand mismatches than the expected costs from such mismatches. This tendency to overpay is mitigated under fixed fee schemes. Second, does it matter whether the option to reduce inventory risk is the outcome of either increased responsiveness from the upstream supplier or advanced demand information from the downstream buyer? Our results suggest that this difference, when only a matter of framing, has no significant effect on willingness‐to‐pay.     

VERTICAL RELATIONS UNDER CREDIT CONSTRAINTS

We model the impact that credit constraints and market risk have on the vertical relationships between firms in the supply chain. Firms which might face credit constraints in future investments become endogenously risk averse when accumulating pledgable assets. In the short run, the optimal supply contract involves risk sharing, so inducing double marginalization. Credit constraints thus result in higher retail prices, and this is true whether the firm is debt or equity funded. Further, we offer a new theory of supplier finance arms as we show an intrinsic complementarity between supply and lending which reduces financing inefficiencies created by informational asymmetries. The model offers: a theory of countervailing power based on credit constraints; a transmission mechanism linking the cost of borrowing with retail prices; and a motive for outsourcing supply (or distribution) in the face of market risk.     

Money as a Unit of Account

We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non‐contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of “currency areas” when there is variation in the intensity of trade within and across regions.     

Complementary Drivers of New Product Development Performance: Cross‐Functional Coordination,Information System Capability,and Intelligence Quality

Coordination efforts that access and align relevant cross‐functional expertise are regarded as an essential element of innovation success. In recent years, these efforts have been further augmented through complementary investments in information systems, which provide the technological platforms for information sharing and coordination across functional and organizational boundaries. Somewhat overlooked has been the critical mediating role of the intelligence gained through these efforts and capabilities. This study draws on the theory of complementarity to elaborate on the nature of this mediating concept. Theoretical predictions of the model are tested using instrument variable regression analysis of data collected from a sample of publicly traded US manufacturing firms. The findings suggest that the effects of both internal and external coordination on market intelligence and supply‐chain intelligence are moderated by the firm's information system capability. The effect of both types of intelligence quality on new product development performance was contingent with the effects being enhanced (attenuated) when the market conditions were dynamic (stable). The results are robust to common‐method bias, endogeneity concerns, and alternative estimation methods.     

When Opportunity Matters: Comparing the Risk‐Taking Attitudes of Prisoners and Recently Released Ex‐Prisoners

Risk‐taking tendencies and environmental opportunities to commit crime are two key features in understanding criminal behavior. Upon release from prison, ex‐prisoners have a much greater opportunity to engage in risky activity and to commit criminal acts. We hypothesized that ex‐prisoners would exhibit greater risk‐taking tendencies compared to prisoners who have fewer opportunities to engage in risky activity and who are monitored constantly by prison authorities. Using cumulative prospect theory to compare the risky choices of prisoners and ex‐prisoners our study revealed that ex‐prisoners who were within 16 weeks of their prison release made riskier choices than prisoners. Our data indicate that previous studies comparing prisoners behind bars with nonoffenders may have underestimated the risk‐taking tendencies of offenders. The present findings emphasize the central role played by risk‐taking attitudes in criminal offending and highlight a need to examine offenders after release from prison.     

Investment and Competitive Matching

We study markets in which agents first make investments and are then matched into potentially productive partnerships. Equilibrium investments and the equilibrium matching will be efficient if agents can simultaneously negotiate investments and matches, but we focus on markets in which agents must first sink their investments before matching. Additional equilibria may arise in this sunk‐investment setting, even though our matching market is competitive. These equilibria exhibit inefficiencies that we can interpret as coordination failures. All allocations satisfying a constrained efficiency property are equilibria, and the converse holds if preferences satisfy a separability condition. We identify sufficient conditions (most notably, quasiconcave utilities) for the investments of matched agents to satisfy an exchange efficiency property as well as sufficient conditions (most notably, a single crossing property) for agents to be matched positive assortatively, with these conditions then forming the core of sufficient conditions for the efficiency of equilibrium allocations.     

Regional Integration,Multinational Enterprise Strategy and the Impact of Country‐level Risk: The Case of the EMU

The European Monetary Union (EMU) provides a new macro‐level, institutional setting for multinational enterprises (MNEs). The authors investigate the impact of regional integration on MNE strategy by analysing Belgian firms’ entry‐mode choices in foreign markets, both EMU and non‐EMU ones, with a focus on what impact remains of country‐level risk. They demonstrate that regional integration has altered the impact of country‐level institutional risk on MNE entry‐mode choices inside the EMU. The conventional predictions of international business theory have been reversed, with higher country‐level risk inside the EMU driving a preference for wholly owned subsidiaries. Within the integrated region, insider firms now view higher country‐level risk as the equivalent of higher, micro‐level contracting risk. Such risk can best be mitigated through full internalization, combined with arm's length contracts, rather than through equity joint ventures.     

Persistent Private Information

This paper studies the design of optimal contracts in dynamic environments where agents have private information that is persistent. In particular, I focus on a continuous‐time version of a benchmark insurance problem where a risk‐averse agent would like to borrow from a risk‐neutral lender to stabilize his utility. The agent privately observes a persistent state variable, typically either income or a taste shock, and he makes reports to the principal. I give verifiable sufficient conditions showing that incentive‐compatible contracts can be written recursively, conditioning on the report and two additional state variables: the agent's promised utility and promised marginal utility of the private state. I then study two examples where the optimal contracts can be solved in closed form, showing how persistence alters the nature of the contract. Unlike the previous discrete‐time models with independent and identically distributed (i.i.d.) private information, the agent's consumption under the contract may grow over time. Furthermore, in my setting the efficiency losses due to private information increase with the persistence of the private information, and the distortions vanish as I approximate an i.i.d. environment.     

Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?

We identify the effects of monetary policy on credit risk‐taking with an exhaustive credit register of loan applications and contracts. We separate the changes in the composition of the supply of credit from the concurrent changes in the volume of supply and quality, and the volume of demand. We employ a two‐stage model that analyzes the granting of loan applications in the first stage and loan outcomes for the applications granted in the second stage, and that controls for both observed and unobserved, time‐varying, firm and bank heterogeneity through time*firm and time*bank fixed effects. We find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex post likelihood of default. A lower long‐term interest rate and other relevant macroeconomic variables have no such effects.     

Competition and Coordination in a Two‐Channel Supply Chain

We study competition and coordination in a supply chain in which a single supplier both operates a direct channel and sells its product through multiple differentiated retailers. We study analytically the supply chain with symmetric retailers and find that the supplier prefers to have as many retailers as possible in the market, even if the retailers' equilibrium retail price is lower than that of the supplier, and even if the number of retailers and their cost or market advantage prevent sales through the direct channel. We find that the two‐channel supply chain may be subject to inefficiencies not present in the single‐channel supply chain. We show that several contracts known to coordinate a single‐channel supply chain do not coordinate the two‐channel supply chain; thus we propose a linear quantity discount contract and demonstrate its ability to perfectly coordinate the two‐channel supply chain with symmetric retailers. We provide some analytical results for the supply chain with asymmetric retailers and propose an efficient solution approach for finding the equilibrium. We find numerically that the supplier still benefits from having more retailers in the market and that linear quantity discount contracts can mitigate supply chain inefficiency, though they no longer achieve perfect coordination.     

Channel Coordination for a Supply Chain with a Risk‐Neutral Manufacturer and a Loss‐Averse Retailer*

This articles considers a decentralized supply chain in which a single manufacturer is selling a perishable product to a single retailer facing uncertain demand. It differs from traditional supply chain contract models in two ways. First, while traditional supply chain models are based on risk neutrality, this article takes the viewpoint of behavioral principal–agency theory and assumes the manufacturer is risk neutral and the retailer is loss averse. Second, while gain/loss (GL) sharing is common in practice, there is a lack of analysis of GL‐sharing contracts in the supply chain contract literature. This article investigates the role of a GL‐sharing provision for mitigating the loss‐aversion effect, which drives down the retailer order quantity and total supply chain profit. We analyze contracts that include GL‐sharing‐and‐buyback (GLB) credit provisions as well as the special cases of GL contracts and buyback contracts. Our analytical and numerical results lend insight into how a manufacturer can design a contract to improve total supply chain, manufacturer, and retailer performance. In particular, we show that there exists a special class of distribution‐free GLB contracts that can coordinate the supply chain and arbitrarily allocate the expected supply chain profit between the manufacturer and retailer; in contrast with other contracts, the parameter values for contracts in this class do not depend on the probability distribution of market demand. This feature is meaningful in practice because (i) the probability distribution of demand faced by a retailer is typically unknown by the manufacturer and (ii) a manufacturer can offer the same contract to multiple noncompeting retailers that differ by demand distribution and still coordinate the supply chains.     

Directed Search for Equilibrium Wage–Tenure Contracts

I construct a theoretical framework in which firms offer wage–tenure contracts to direct the search by risk‐averse workers. All workers can search, on or off the job. I characterize an equilibrium and prove its existence. The equilibrium generates a nondegenerate, continuous distribution of employed workers over the values of contracts, despite that all matches are identical and workers observe all offers. A striking property is that the equilibrium is block recursive; that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers. This property makes the equilibrium analysis tractable. Consistent with stylized facts, the equilibrium predicts that (i) wages increase with tenure, (ii) job‐to‐job transitions decrease with tenure and wages, and (iii) wage mobility is limited in the sense that the lower the worker's wage, the lower the future wage a worker will move to in the next job transition. Moreover, block recursivity implies that changes in the unemployment benefit and the minimum wage have no effect on an employed worker's job‐to‐job transitions and contracts.     

Financial Intermediaries and Markets

A complex financial system comprises both financial markets and financial intermediaries. We distinguish financial intermediaries according to whether they issue complete contingent contracts or incomplete contracts. Intermediaries such as banks that issue incomplete contracts, e.g., demand deposits, are subject to runs, but this does not imply a market failure. A sophisticated financial system—a system with complete markets for aggregate risk and limited market participation—is incentive‐efficient, if the intermediaries issue complete contingent contracts, or else constrained‐efficient, if they issue incomplete contracts. We argue that there may be a role for regulating liquidity provision in an economy in which markets for aggregate risks are incomplete.     

Private Information and Insurance Rejections

Across a wide set of nongroup insurance markets, applicants are rejected based on observable, often high‐risk, characteristics. This paper argues that private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no‐trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no‐trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents' beliefs. I apply this approach to three nongroup markets: long‐term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance, and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest that private information prevents the existence of large segments of these three major insurance markets.     

VERTICAL INTEGRATION AND TECHNOLOGY: THEORY AND EVIDENCE

We study the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant‐level data for the UK manufacturing sector. Most importantly, and consistent with the theoretical predictions, we find that the technology intensity of downstream (producer) industries is positively correlated with the likelihood of integration whereas the intensity of upstream (supplier) industries is negatively correlated with it. Also consistent with theory, both correlations are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm‐ and industry‐level characteristics. (JEL: L22, L23, L24, L60)     

Complexity as a Contract Design Factor: A Human‐to‐Human Experimental Study

Despite being theoretically suboptimal, simpler contracts (such as price‐only contracts and quantity discount contracts with limited number of price blocks) are commonly preferred in practice. Thus, exploring the tension between theory and practice regarding complexity and performance in contract design is especially relevant. Using human subject experiments, Kalkancı et al. (2011) showed that such simpler contracts perform effectively for a supplier interacting with a computerized buyer under asymmetric demand information. We use a similar set of experiments with the modification that a human supplier interacts with a human buyer. We show that human interactions strengthen the supplier's preference for simpler contracts. We find that suppliers have fairness concerns even when they interact with computerized buyers. These fairness concerns tend to be even stronger when suppliers interact with human buyers, particularly when the complexity of the contract is low. We also find that suppliers are more prone to random decision errors (i.e., bounded rationality) when interacting with human buyers. In the absence of social preferences, Kalkancı et al. identified reinforcement and bounded rationality as key biases that impact suppliers' decisions. In human‐to‐human experiments, we find evidence for social preference effects. However, these effects may be secondary to bounded rationality.     

Microfinance,Mission Drift,and the Impact on the Base of the Pyramid: A Resource‐Based Approach

This article draws on resource‐based theory and the literature on strategic intent to develop a theoretical model that explains the concept of mission drift in microfinance institutions (MFIs). We argue that the differential strategic intents of commercially oriented, for‐profit, and socially oriented nonprofit organizations drive the acquisition of disparate resources and capabilities, which in turn drives distinct performance outcomes, including a focus on different markets within the overall base of the pyramid (BOP). The article suggests that it is the dynamic aspects of changing strategic intent and the consequent timing delays in the development of associated resources and capabilities that lead to various issues of mission drift. Finally, we suggest that cross‐sector alliances between for‐profit and nonprofit MFIs may benefit from the unique capabilities of both types of organizations and deliver the most and broadest impact on poverty alleviation in BOP markets.     

Riester-Vertr?ge: Zur Bedeutung von Kosten und Garantien aus Anlegersicht

The article discusses insurance- and mutual fund-based Riester contracts with respect to the different cost structures and the nominal capital guarantee. A mutual fund-based contract is represented by a plan with a high equity exposure and a nominal capital guarantee, while an insurance-based contract is approximated by a contract with a lower equity exposure and a guaranteed annual rate of return of 2.25%. Both approaches are implemented using a constant proportion portfolio insurance (CPPI) strategy to ensure the relevant capital guarantee. Without taking cost into account, mutual fund-based contracts seem to be the preferred choice for large segments of the population. However, insurance-based Riester contracts become more attractive once the differences in the cost structures are taken into account. The cost disadvantage of mutual fund-based Riester contracts, which occurs whenever the active managers cannot beat the market, is especially important for weakly risk-averse investors, i.e. for the classic clientele of risky investments. Similarly, these savers suffer most from the nominal capital guarantee of mutual fund-based contracts because these individuals would prefer a constant-mix strategy over a CPPI strategy. Thus, the differences in cost structure and the nominal capital guarantee can be identified as possible reasons for the persistently high market shares of insurance-based contracts in the Riester market. However, mutual fund-based Riester contracts are still the first choice for many savers. For example, people with relatively secure private property outside a Riester contract would prefer mutual fund-based contracts, despite cost and capital guarantee issues. The results suggest that mutual fund-based Riester contracts that use Exchange Traded Funds are an attractive product innovation in the Riester market.