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Agents' incentives under buy-back contracts in a two-stage supply chain

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  • Wang, Yulan
  • Zipkin, Paul
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    Abstract

    This paper investigates how the behavior of individual decision makers can affect the performance of a supply chain. We study a two-stage supplier-retailer system, using a buy-back contract. Each firm's actions are executed by an agent. The retailer's purchasing agent and the supplier's sales agent are compensated based on certain performance measures, and they act accordingly. We study the impacts of their behavior in both the supplier-as-leader and retailer-as-leader settings. We find that, unless their incentives are carefully constructed, the agents can strongly distort the system's behavior. Specifically, "channel stuffing" (packing the distribution channel with excess inventory) can occur in both settings. Only when the agents are compensated based on net profit do they act in accord with their firms' objectives. These results may help explain some recent scandals.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Production Economics.

    Volume (Year): 120 (2009)
    Issue (Month): 2 (August)
    Pages: 525-539

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    Handle: RePEc:eee:proeco:v:120:y:2009:i:2:p:525-539

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    Web page: http://www.elsevier.com/locate/ijpe

    Related research

    Keywords: Buy-back Supply chain Compensation;

    References

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    18. Erica L. Plambeck & Stefanos A. Zenios, 2000. "Performance-Based Incentives in a Dynamic Principal-Agent Model," Manufacturing & Service Operations Management, INFORMS, vol. 2(3), pages 240-263, April.
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    Cited by:
    1. Ruiz-Benitez, Rocio & Muriel, Ana, 2014. "Consumer returns in a decentralized supply chain," International Journal of Production Economics, Elsevier, vol. 147(PC), pages 573-592.
    2. Xiao, Tiaojun & Shi, Kuiran & Yang, Danqin, 2010. "Coordination of a supply chain with consumer return under demand uncertainty," International Journal of Production Economics, Elsevier, vol. 124(1), pages 171-180, March.

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