Trust in Forecast Information Sharing

Management Science, Vol. 57, No. 6, pp 1111-1137, 2011

27 Pages Posted: 24 Sep 2009 Last revised: 14 Oct 2017

See all articles by Özalp Özer

Özalp Özer

Jindal School of Management - The University of Texas at Dallas

Yanchong Zheng

Stanford University

Kay-Yut Chen

University of Texas at Arlington

Date Written: September 23, 2009

Abstract

This paper investigates the capacity investment decision of a supplier who solicits private forecast information from a manufacturer. To ensure abundant supply, the manufacturer has an incentive to inflate her forecast in a costless, non-binding, and non-verifiable type of communication known as "cheap talk.'' According to standard game theory, parties do not cooperate and the only equilibrium is uninformative -- the manufacturer's report is independent of her forecast and the supplier does not use the report to determine capacity. However, we observe in controlled laboratory experiments that parties cooperate even in the absence of reputation-building mechanisms and complex contracts. We argue that the underlying reason for cooperation is trust. The extant literature on forecast sharing and supply chain coordination implicitly assumes that supply chain members either absolutely trust each other and cooperate when sharing forecast information, or do not trust each other at all. Contrary to this all-or-nothing view, we determine that a continuum exists between these two extremes. In addition, we determine (i) when trust is important in forecast information sharing, (ii) how trust is affected by changes in the supply chain environment, and (iii) how trust affects related operational decisions. To explain and better understand the observed behavioral regularities, we also develop an analytical model of trust to incorporate both pecuniary and non-pecuniary incentives in the game-theoretic analysis of cheap-talk forecast communication. The model identifies and quantifies how trust and trustworthiness induce effective cheap-talk forecast sharing under the wholesale price contract. We also determine the impact of repeated interactions and information feedback on trust and cooperation in forecast sharing. We conclude with a discussion on the implications of our results for developing effective forecast management policies.

Keywords: Trust, trustworthiness, cheap talk, asymmetric forecast information, wholesale price contract, behavioral economics, experimental economics

Suggested Citation

Özer, Özalp and Zheng, Yanchong and Chen, Kay-Yut, Trust in Forecast Information Sharing (September 23, 2009). Management Science, Vol. 57, No. 6, pp 1111-1137, 2011. Available at SSRN: https://ssrn.com/abstract=1477563

Özalp Özer (Contact Author)

Jindal School of Management - The University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Road
Richardson, TX 75080
United States

Yanchong Zheng

Stanford University ( email )

Stanford, CA 94305
United States

Kay-Yut Chen

University of Texas at Arlington ( email )

Arlington, TX
United States

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