Are Two a Good Representative for Many?

Kerschbamer, Rudolf; Maderner, Nina

doi:10.1006/jeth.1997.2456

Cited by 18 publications

(15 citation statements)

References 11 publications

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“…The same conclusion can be derived for the menus of types 4 and 5 from their necessary optimality conditions. This generalizes the result of Kerschbamer and Maderner (1998) as well.…”

Section: Properties Of Optimal Solutionssupporting

confidence: 89%

“…These five generic types can be described as follows: type 1 -first-best quantities, both individual rationality (IR) constraints bind, while the incentive compatibility (IC) constraints do not; types 2 and 3 -one IR constraint and one IC constraint bind; types 4 and 5 -both IR constraints and one IC constraint bind. This result is in line with the existence of five possible menu types derived by Kerschbamer and Maderner (1998) for the adverse selection problem with countervailing incentives under more restrictive assumptions (among which is a strict monotonicity of utility functions in quantity, and the single-crossing condition). Our result thus generalizes theirs.…”

Section: Properties Of Optimal Solutionssupporting

confidence: 84%

“…Bunching occurs namely when a KKT solution of type 7a or 8a proves to be optimal. This possibility represents a marked contrast to the classical result of Section 2 and the results of Kerschbamer and Maderner (1998). We elaborate in Proposition 3 below on the conditions under which bunching takes place.…”

Section: Properties Of Optimal Solutionsmentioning

confidence: 84%

“…Regarding ii), Kerschbamer and Maderner (1998) and Jullien (2000) studied the problem in the discrete and continuous-type settings, respectively, assuming that reservation utility depends on the agent type -what leads to countervailing incentives and may result in a different solution structure compared to the above classical results. Regarding iii), Rochet and Stole (2003) point out that most of the studies assume the information asymmetry to be one-dimensional, while the agent's hidden characteristics are in many settings inherently multi-dimensional.…”

Section: Adverse Selection Problemsmentioning

confidence: 99%

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Optimal contract design in the joint economic lot size problem with multi-dimensional asymmetric information

Pishchulov

Richter

2016

European Journal of Operational Research

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Previous work has studied the classical joint economic lot size model as an adverse selection problem with asymmetric cost information. Solving this problem is challenging due to the presence of countervailing incentives and two-dimensional information asymmetry, under which the classical single-crossing condition does not need to hold. In the present work we advance the existing knowledge about the problem on hand by conducting its optimality analysis, which leads to a better informed and an easier problem solution: First, we refine the existing closed-form solution, which simplifies problem solving and its analysis. Second, we prove that Karush-Kuhn-Tucker conditions are necessary for optimality, and demonstrate that the problem may, in general, possess non-optimal stationary points due to non-convexity. Third, we prove that certain types of stationary points are always dominated, which eases the analytical solution of the problem. Fourth, we derive a simple optimality condition stating that a weak Pareto efficiency of the buyer's possible cost structures implies optimality of any stationary point. It simplifies the analytical solution approach and ensures a successful solution of the problem by means of conventional numerical techniques, e.g. with a general-purpose solver. We further establish properties of optimal solutions and indicate how these are related with the classical results on adverse selection.

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“…The same conclusion can be derived for the menus of types 4 and 5 from their necessary optimality conditions. This generalizes the result of Kerschbamer and Maderner (1998) as well.…”

Section: Properties Of Optimal Solutionssupporting

confidence: 89%

Section: Properties Of Optimal Solutionssupporting

confidence: 84%

Section: Properties Of Optimal Solutionsmentioning

confidence: 84%

Section: Adverse Selection Problemsmentioning

confidence: 99%

See 2 more Smart Citations

Optimal contract design in the joint economic lot size problem with multi-dimensional asymmetric information

Pishchulov

Richter

2016

European Journal of Operational Research

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“…An alternative formulation is the continuous-type case (see, eg, Corbett and de Groote, 2000), in which there is a continuum of types h; h Â Ã with support of a density function. We refer to Kerschbamer and Maderner (1998) for a discussion and comparison of the respective model formulations.…”

Section: Asymmetric Informationmentioning

confidence: 99%

Inequity aversion in a joint economic lot sizing environment with asymmetric holding cost information

Voigt

2015

Journal of the Operational Research Society

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Screening contracts (or 'menu of contracts') are frequently used for aligning the incentives in supply chains with private information. In this context, it is assumed that all supply chain parties are strictly (expected) profitmaximizing. However, previous empirical work shows that this is a critical assumption. In fact, it seems that inequity adverse subjects are willing to invest money for achieving higher relative payoffs. Interestingly, the classical approach to design incentive compatible mechanisms gives the agent cheap leeway to increase relative pecuniary payoffs and thereby achieving more equitable profit allocations, because the agent is left (almost) indifferent between two contract alternatives. In other words, we argue (and actually observe in laboratory experiments) that this classical approach of contract design allows the agent to achieve more equitable outcomes at low cost. Since the agent's better relative performance solely stems from reducing the principal's payoffs, we observe a substantial negative impact on the overall supply chain performance. The present work relaxes the assumption of the profit-maximizing buyer (agent) in a serial supply chain for a lot sizing framework with asymmetrically distributed holding cost information and deterministic end-customer demand. The study provides researchers and managers an approach on how to account for disadvantageous inequity aversion (ie, the agent suffers from profits being lower than the principals profits) by designing a contract that anticipates such behaviour while providing a solution method for the resulting non-linear mathematical program. We denote the resulting contract as 'behavioural robust', since it limits the inefficiency losses that result if agents exhibit disadvantageous inequity aversion instead of being strictly profit-maximizing. A numerical study compares the advantages of the 'behavioural robust' contract against the classical screening contract. The results highlight that supply chain performance losses can be substantially reduced under the behavioural robust contract.

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Contracting Under Asymmetric Holding Cost Information in a Serial Supply Chain with a Nearly Profit Maximizing Buyer

Voigt

2013

Operations Research Proceedings

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Screening contracts (or non-linear "menu of contracts") are frequently used for aligning the incentives in supply chains with private information. In this context, it is assumed that all supply chain parties are strictly (expected) profit maximizing and, therefore, sensible to even arbitrarily small pay-off differences between contract alternatives. However, previous behavioral work on contracting under asymmetric information in supply chains shows that agents (buyers) are not always strictly profit maximizing. Instead, they sometimes tend to choose contracts that have only a minor impact on their own performance but a substantially negative impact on the principal's (supplier's) and the overall supply chain's performance. Thus, these studies indicate that the buyers are in fact not strictly but only nearly profit maximizing when making their contract choices. The present work relaxes the assumption of the strictly profit maximizing buyer in a serial supply chain for a lotsizing framework with asymmetrically distributed holding cost information and deterministic end-customer demand. The study provides researchers and managers an approach on how to account for the buyer's insensitivity to arbitrarily small pay-off differences while providing a solution method for the resulting non-linear mathematical program. A numerical study compares the advantages of the "behavioral robust" contract assuming only nearly profit maximizing buyers against the classical screening contract assuming strictly profit maximizing buyers. The results highlight that supply chain performance losses can be substantially reduced under the behavioral robust contract.

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Are Two a Good Representative for Many?

Cited by 18 publications

References 11 publications

Optimal contract design in the joint economic lot size problem with multi-dimensional asymmetric information

Optimal contract design in the joint economic lot size problem with multi-dimensional asymmetric information

Inequity aversion in a joint economic lot sizing environment with asymmetric holding cost information

Contracting Under Asymmetric Holding Cost Information in a Serial Supply Chain with a Nearly Profit Maximizing Buyer

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