Supply Chain Coordination in Case of Asymmetric Information: Information Sharing and Contracting in a Just-in-Time Environment

Abstract

Information sharing is frequently discussed as a main enhancer for supply chain cooperation. This holds particularly true for environments that are characterized by asymmetrically distributed information concerning, e.g., cost parameters or end-customer demand. Yet, if the supply chain parties are profit-maximizing and fully rational, credible information sharing might not be established due to misaligned incentives. In this context, non-linear contract schemes are intensively discussed in the supply chain coordination literature, since they coordinate the supply chain to a second-best outcome. The present work applies methods of non-linear optimization in order to obtain optimal contracting schemes (so-called screening contracts) in a strategic lot sizing framework. The validity of the applied theory is tested via laboratory experiments. This approach allows for identifying the main critical assumptions within the theory while showing that non-predicted behavior leads to a deterioration of supply chain performance. Interestingly, the experiments reveal that—in contrast to standard assumptions—the impact of information sharing is ambiguous and dependent on several factors, such as contract flexibility and complexity. The experimental results form the basis for a behavioral principal-agent model. The model gives valuable insights on how the interaction of information sharing and information processing impacts the supply chain performance.