Experimental Studies on Supply Chain Contracting

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Supply chain contracting is a classic topic in operations management. While the traditional literature typically assumes a rational decision-maker, the behavioral operations management literature has shown that human decision-makers may exhibit behavioral biases and deviate from optimality. Given that many operational decisions are made by managers in practice, it is essential to understand the role of behavioral factors. This dissertation experimentally studies three problems in supply chain contracting, each of which is summarized as follows. The first chapter focuses on inventory sharing, comparing alternative inventory-sharing strategies in a two-tier supply chain with an upstream manufacturer and two downstream retailers. In one setting, retailers act as if they are centralized and use a single quantity to fulfill joint demand. In the other, retailers are decentralized and face separate demands, but they can transfer inventory after demands are realized. In the latter, decentralized scenario, whether the manufacturer or retailers have decision authority over the inventory transfer price is also considered. By conducting lab experiments, this work shows that when the retailers are decentralized and the manufacturer sets the transfer price, both retailers and the manufacturer earn higher profits than in the centralized retailer strategy, which runs counter to theory. This chapter is a joint work with Andrew Davis and Douglas Thomas (University of Virginia). The second chapter turns to supply chain finance and investigates a trade credit contract between a supplier and a financially distressed retailer. The supplier sets a wholesale price for the retailer, who begins with some initial capital and orders from the supplier. The retailer will purchase through trade credit if the initial capital is insufficient and repay the supplier after demand realization. The retailer will go bankrupt if the realized demand is too low. Experimental results suggest that when retailers' risk is medium or high, they significantly understock to maintain lower risk and suppliers offer lower prices (but not necessarily less risk) to retailers. When retailers' risk is very low, they slightly overstock, which brings them additional bankruptcy risk. This chapter is a joint work with Andrew Davis and Kyle Hyndman (University of Texas at Dallas). The third chapter studies management of responsible sourcing and reputation risk in a two-tier supply chain consisting of an upstream supplier and a downstream buyer. The supplier faces random cost shock which can be mitigated by exerting effort. The supplier's effort has two types which differ in cost and whether it complies with the buyer's responsible standards. A non-compliant effort will incur extra reputation loss for the buyer. The buyer offers a risk-sharing contract: a wholesale price and sharing some of the cost shock with the supplier. While the theory suggests that the supplier always prefers non-compliant effort, experimental results show that 25.82% of suppliers choose compliant effort. More surprisingly, the effort choice is driven only by the wholesale price but not by the cost-shock sharing, which is inconsistent with the theory. This chapter is a joint work with Andrew Davis and Li Chen.

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217 pages


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Behavioral Operations; Supply Chain Contracting; Supply Chain Management


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Union Local


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Davis, Andrew M.

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Gaur, Vishal
Chen, Li
Forman, Chris

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Ph. D., Management

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Doctor of Philosophy

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Government Document




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dissertation or thesis

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