Motivating Supplier Social Responsibility under Incomplete Visibility

33 Pages Posted: 30 Aug 2017 Last revised: 24 Jul 2018

See all articles by Tim Kraft

Tim Kraft

Massachusetts Institute of Technology (MIT) - Sloan School of Management

León Valdés

University of Pittsburgh - Katz Graduate School of Business

Yanchong Zheng

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: August 28, 2017

Abstract

Problem Definition: We examine how a profit-driven firm (she) can motivate better social responsibility (SR) practices by a supplier (he) when these practices cannot be perfectly observed by the firm. We focus on the firm's investment in the supplier's SR capabilities. To capture the influence of consumer demands, we incorporate the potential for SR information to be disclosed by the firm or revealed by a third party.

Academic/Practical Relevance: Most firms have limited visibility into the SR practices of their suppliers. However, there is little research on how a firm under incomplete visibility should (i) invest to improve a supplier's SR practices and (ii) disclose SR information to consumers. We address this gap.

Methodology: We develop a game-theoretic model with asymmetric information to study a supply chain with one supplier and one firm. The firm makes her investment decision given incomplete information about the supplier's current SR practices. We analyze and compare two settings -- the firm does not disclose versus she discloses SR information to the consumers.

Results: The firm should invest a high (low) amount in the supplier's capabilities if the information she observes suggests the supplier's current SR practices are poor (good). She should always be more aggressive with her investment when disclosing (versus not disclosing). This more aggressive strategy ensures better supplier SR practices under disclosure. When choosing between disclosing and not disclosing, the firm most likely prefers not to disclose when the supplier's current SR practices appear to be average.

Managerial Implications: (i) Greater visibility helps the firm to better tailor her investment to the level of support needed. (ii) Better visibility also makes the firm more "truthful" in her disclosure, while increased third-party scrutiny makes her more "cautious". (iii) Mandating disclosure is most beneficial for SR when the suppliers' current practices appear to be average.

Keywords: Social Responsibility, Supply Chain Transparency, Supplier Development, Information Disclosure, Game Theory, Information Asymmetry

Suggested Citation

Kraft, Tim and Valdés, León and Zheng, Yanchong, Motivating Supplier Social Responsibility under Incomplete Visibility (August 28, 2017). MIT Sloan Research Paper No. 5267-17. Available at SSRN: https://ssrn.com/abstract=3028117 or http://dx.doi.org/10.2139/ssrn.3028117

Tim Kraft (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

León Valdés

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Yanchong Zheng

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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