Information Acquisition and Voluntary Disclosure in an Export-Processing System

Production and Operations Management, Forthcoming

38 Pages Posted: 18 Feb 2013

See all articles by Long Gao

Long Gao

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

Zhaolin Li

The University of Sydney Business School

Biying Shou

City University of Hong Kong

Date Written: February 17, 2013

Abstract

We study a strategic information management problem in the export-processing trade, where the buyer controls the raw material input and sales and the producer is responsible for production. The production is vulnerable to random yield risk. The producer can exert a costly effort to acquire the private yield rate information and discretionarily share it with the buyer. We develop a sequential Bayesian game model that captures three key features of the system --- endogenous information endowment, voluntary disclosure, and ex post information sharing --- a significant departure from the literature. The optimal disclosure strategy is driven by the trade-off between the gains from Pareto efficiency improvement and self-interested overproduction. It is specified by two thresholds on yield rate: only the middle producers with yield rate between these two thresholds share private information to improve supply-demand match; the low- and high-yield producers withhold information to extract excess input from the buyer. The buyer in response penalizes nondisclosure with reduced input and rewards information sharing with a larger order. This strategic interaction is further exacerbated by the double marginalization effect from decentralization, resulting in severe efficiency loss. We examine the effectiveness of three corrective mechanisms --- vertical integration, mandatory disclosure, and production restriction --- and reveal the costs of information suppressive effect and overinvestment incentive, and the benefit from concessions on processing fee. Our study endogenizes the asymmetric supply risk and provides the first attempt to rationalize the strategic interactions of informational and operational incentives in the export-processing system.

Keywords: export-processing, supply risk, random yield, information asymmetry, voluntary information sharing, Bayesian game

Suggested Citation

Gao, Long and Li, Zhaolin and Shou, Biying, Information Acquisition and Voluntary Disclosure in an Export-Processing System (February 17, 2013). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2220057

Long Gao (Contact Author)

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

Riverside, CA 92521
United States

HOME PAGE: http://longgao.wordpress.com/

Zhaolin Li

The University of Sydney Business School ( email )

Room 490, Merewether Building
Sydney, NSW 2006
Australia

HOME PAGE: http://www.econ.usyd.edu.au/staff/erickl

Biying Shou

City University of Hong Kong ( email )

Department of Management Sciences
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/Portfolio/Staff.cfm?EID=biyishou

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