Fairness and Coordination Failures in Supply Chain Contracts

29 Pages Posted: 29 Jun 2015

See all articles by Valery Pavlov

Valery Pavlov

The University of Auckland Business School

Elena Katok

University of Texas at Dallas

Date Written: July 7, 2011

Abstract

Channel coordination using contracts is a topic that commanded a great deal of attention in the supply chain management literature. Several recent studies that tested the performance of coordinating contracts in the laboratory found that they fail to coordinate channels, and a major reason for this failure is that a significant proportion of offers are rejected. Our study extends the body of research on channel coordination by developing a new model based on fairness and bounded rationality, that aims to explain rejections. When fairness considerations are private information, we derive an optimal contract and characterize conditions in which this optimal contract implies rejections. Thus, our major finding is that when fairness considerations are private information, they may lead to rejections even when agents are fully rational.

Keywords: behavioral operations, supply chain coordination, bounded rationality, fairness, contract, mechanism design

JEL Classification: c70, d63, d82, l14

Suggested Citation

Pavlov, Valery and Katok, Elena, Fairness and Coordination Failures in Supply Chain Contracts (July 7, 2011). Available at SSRN: https://ssrn.com/abstract=2623821 or http://dx.doi.org/10.2139/ssrn.2623821

Valery Pavlov (Contact Author)

The University of Auckland Business School ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

Elena Katok

University of Texas at Dallas ( email )

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

HOME PAGE: http://www.utdallas.edu/~ekatok/

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