Adverse Selection Incentive Model and Contract Analysis
Adverse selection can decrease supply chain efficiency and the incentive theory is usually used to combat the inefficiency. To clarify if this inefficiency is influenced by trade credit causing risk to suppliers, incentive models are built separately usin
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Adverse Selection Incentive Model and Contract Analysis Hong Cheng, Hongmei Guo and Xianyu Wang
Abstract Adverse selection can decrease supply chain efficiency and the incentive theory is usually used to combat the inefficiency. To clarify if this inefficiency is influenced by trade credit causing risk to suppliers, incentive models are built separately using Principle-agent theory for trade credit and cash trades. Through solving these models and comparing incentive contracts, this paper arrives at some definitive conclusions. Firstly, incentive contracts can stimulate the supplier to publish the true costs. Secondly, trading quantities under asymmetric information are distorted downwards compared with trading quantities under symmetric information. Thirdly, supply chain efficiency is not influenced by trade credit. The conclusions obtained under the symmetric and asymmetric information conditions and some key model parameters used in this paper are analyzed using a numerical approach. Keywords Supply chain · Trade credit · Adverse selection · Principle-agent theory · Incentive model
126.1 Introduction As one of the ways to finance supply chains, trade credit solves retailer capital shortage problems and transfers the unsalable risk from the retailer to the supplier. Therefore, trade credit is widely used and has been the subject of significant research in the logistics field. However, to date, there has been little research that has considered asymmetric information even though it is known that such information can reduce supply chain efficiency. Supply chain management is the integrated management of logistics, information flow and cash flow, so effective coordination of these H. Cheng College of Management Science, Chengdu University of Technology, Chengdu 610059, People’s Republic of China H. Guo (B) · X. Wang Business School, Sichuan University, Chengdu 610065, People’s Republic of China e-mail: [email protected] © Springer Science+Business Media Singapore 2017 J. Xu et al. (eds.), Proceedings of the Tenth International Conference on Management Science and Engineering Management, Advances in Intelligent Systems and Computing 502, DOI 10.1007/978-981-10-1837-4_126
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elements can guarantee the highest efficiency of supply chain. Therefore, studying the effect of asymmetric information and trade credit is valuable. After Goyal [4] introduced the EOQ model to trade credit, research has studied retailer order policies [1, 11] and supplier trade credit policies [7, 10] under different situations. Considering that supply chain efficiency can be reduced by adverse selections caused by asymmetric information. He and Xu [5] found that retailer’s capital costs were asymmetric information and built an incentive model to study supplier optimal credit periods and retailer optimal order quantities, which enhanced supply chain efficiency. Yu and Luo [8] used reverse auctions to solve the adverse selection because of supplier’s private information about product costs from the retailer perspective
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