Incentive Design for Operations-Marketing Multitasking

Management Science, Forthcoming

58 Pages Posted: 29 Aug 2018 Last revised: 22 May 2020

See all articles by Tinglong Dai

Tinglong Dai

Johns Hopkins University - Carey Business School

Rongzhu Ke

Hong Kong Baptist University - Department of Economics

Christopher Ryan

University of Chicago - Booth School of Business

Date Written: March 22, 2020

Abstract

A firm hires an agent (e.g., store manager) to undertake both operational and marketing tasks. Marketing tasks boost demand, but for demand to translate into sales, operational effort is required to maintain adequate inventory. The firm designs a compensation plan to induce the agent to put effort into both marketing and operations while facing “demand censoring” (i.e., demand in excess of available inventory is unobservable). We formulate this incentive-design problem in a principal-agent framework with a multitasking agent subject to a censored signal. We develop a bang-bang optimal control approach, with a general optimality structure applicable to a broad class of incentive-design problems. Using this approach, we characterize the optimal compensation plan, with a bonus region resembling a “mast” and “sail,” such that a bonus is paid when either all inventory above a threshold is sold or the sales quantity meets an inventory-dependent target. The optimal “mast and sail” compensation plan implies non-monotonicity, where the agent can be less likely to receive a bonus for achieving a better outcome. This gives rise to an ex post moral hazard issue where the agent may “hide” inventory to earn a bonus. We show this ex post moral hazard issue is a result of demand censoring. If available information includes a waitlist (or other noisy signals) to gauge unsatisfied demand, no ex post moral hazard issues remain.

Keywords: marketing-operations multitasking, retail operations, moral hazard, bang-bang control

JEL Classification: C61, D82, D86, J33

Suggested Citation

Dai, Tinglong and Ke, Rongzhu and Ryan, Christopher, Incentive Design for Operations-Marketing Multitasking (March 22, 2020). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3235866 or http://dx.doi.org/10.2139/ssrn.3235866

Tinglong Dai (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty/tinglong-dai-phd

Rongzhu Ke

Hong Kong Baptist University - Department of Economics ( email )

Hong Kong

HOME PAGE: http://econ.hkbu.edu.hk/eng/faculty/admin-details.jsp?id=rongzhukeHKB&cv=00069&cid=186&cvurl=

Christopher Ryan

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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