Risk Aversion and Supply Chain Contract Negotiation

32 Pages Posted: 29 Jan 2009

See all articles by Matthew J. Sobel

Matthew J. Sobel

Case Western Reserve University; Weatherhead School of Management, Case Western Reserve University

Danko Turcic

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Date Written: December 3, 2008

Abstract

We employ the Nash bargaining solution to determine the value of an opportunity to negotiate a contract in an archetypal supply chain game. This unifies the allocation of payoffs and the selection of the type of contract in a bilateral supply chain; a supplier delivers goods to a news vendor retailer who stocks in anticipation of stochastic seasonal demand. Both firms have concave, ordinal utility functions which allows us to model both risk-neutrality and risk-aversion. We characterize the Nash-optimal contracts, and contrast the cases where both firms are risk-neutral and where at least one of the firms is risk-averse. Risk aversion, it turns out, has a significant impact on the contract terms and one firm's risk aversion may be advantageous to the other. This suggests that each firm should strive to find a supply chain partner based on its own and its prospective partner's sensitivities to risk. For example, risk-neutral firms have an incentive to avoid other risk-neutral firms as their supply chain partners.

Keywords: Supply chain coordination, risk-aversion, supply contracts, bargaining

Suggested Citation

Sobel, Matthew J. and Sobel, Matthew J. and Turcic, Danko, Risk Aversion and Supply Chain Contract Negotiation (December 3, 2008). Available at SSRN: https://ssrn.com/abstract=1334695 or http://dx.doi.org/10.2139/ssrn.1334695

Matthew J. Sobel

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

HOME PAGE: http://https://weatherhead.case.edu/faculty/emeriti-faculty/matthew-sobel

Weatherhead School of Management, Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Danko Turcic (Contact Author)

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

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