IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Optimal contract design in the joint economic lot size problem with multi-dimensional asymmetric information

Listed author(s):
  • Pishchulov, Grigory
  • Richter, Knut

Previous work has studied the classical joint economic lot size model as an adverse selection problem with asymmetric cost information. Solving this problem is challenging due to the presence of countervailing incentives and two-dimensional information asymmetry, under which the classical single-crossing condition does not need to hold. In the present work we advance the existing knowledge about the problem on hand by conducting its optimality analysis, which leads to a better informed and an easier problem solution: First, we refine the existing closed-form solution, which simplifies problem solving and its analysis. Second, we prove that Karush–Kuhn–Tucker conditions are necessary for optimality, and demonstrate that the problem may, in general, possess non-optimal stationary points due to non-convexity. Third, we prove that certain types of stationary points are always dominated, which eases the analytical solution of the problem. Fourth, we derive a simple optimality condition stating that a weak Pareto efficiency of the buyer’s possible cost structures implies optimality of any stationary point. It simplifies the analytical solution approach and ensures a successful solution of the problem by means of conventional numerical techniques, e.g. with a general-purpose solver. We further establish properties of optimal solutions and indicate how these are related with the classical results on adverse selection.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0377221716301060
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 253 (2016)
Issue (Month): 3 ()
Pages: 711-733

as
in new window

Handle: RePEc:eee:ejores:v:253:y:2016:i:3:p:711-733
DOI: 10.1016/j.ejor.2016.02.053
Contact details of provider: Web page: http://www.elsevier.com/locate/eor

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Affisco, John F. & Javad Paknejad, M. & Nasri, Farrokh, 2002. "Quality improvement and setup reduction in the joint economic lot size model," European Journal of Operational Research, Elsevier, vol. 142(3), pages 497-508, November.
  2. Sucky, Eric, 2006. "A bargaining model with asymmetric information for a single supplier-single buyer problem," European Journal of Operational Research, Elsevier, vol. 171(2), pages 516-535, June.
  3. Liu, Xingchu & Cetinkaya, Sila, 2007. "A note on "quality improvement and setup reduction in the joint economic lot size model"," European Journal of Operational Research, Elsevier, vol. 182(1), pages 194-204, October.
  4. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  5. Figalli, Alessio & Kim, Young-Heon & McCann, Robert J., 2011. "When is multidimensional screening a convex program?," Journal of Economic Theory, Elsevier, vol. 146(2), pages 454-478, March.
  6. Kerschbamer, Rudolf & Maderner, Nina, 1998. "Are Two a Good Representative for Many?," Journal of Economic Theory, Elsevier, vol. 83(1), pages 90-104, November.
  7. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  8. Cecchini, Mark & Ecker, Joseph & Kupferschmid, Michael & Leitch, Robert, 2013. "Solving nonlinear principal-agent problems using bilevel programming," European Journal of Operational Research, Elsevier, vol. 230(2), pages 364-373.
  9. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
  10. Martin F. Hellwig, 2010. "Incentive Problems With Unidimensional Hidden Characteristics: A Unified Approach," Econometrica, Econometric Society, vol. 78(4), pages 1201-1237, 07.
  11. Glock, C. H. & Kim, T., 2012. "A joint economic lot sizemodel with returnable transport items," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 59079, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
  12. Charles J. Corbett & Xavier de Groote, 2000. "A Supplier's Optimal Quantity Discount Policy Under Asymmetric Information," Management Science, INFORMS, vol. 46(3), pages 444-450, March.
  13. Pibernik, Richard & Zhang, Yingying & Kerschbaum, Florian & Schröpfer, Axel, 2011. "Secure collaborative supply chain planning and inverse optimization - The JELS model," European Journal of Operational Research, Elsevier, vol. 208(1), pages 75-85, January.
  14. Araujo, Aloisio & Moreira, Humberto, 2010. "Adverse selection problems without the Spence-Mirrlees condition," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1113-1141, May.
  15. van Ackere, Ann, 1993. "The principal/agent paradigm: Its relevance to various functional fields," European Journal of Operational Research, Elsevier, vol. 70(1), pages 83-103, October.
  16. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  17. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  18. Schottmüller, Christoph, 2015. "Adverse selection without single crossing: Monotone solutions," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 127-164.
  19. Glock, C. H., 2012. "The joint economic lot size problem: a review," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 57811, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
  20. Wang, Jian-Cai & Lau, Hon-Shiang & Lau, Amy Hing Ling, 2009. "When should a manufacturer share truthful manufacturing cost information with a dominant retailer?," European Journal of Operational Research, Elsevier, vol. 197(1), pages 266-286, August.
  21. Ben-Daya, M. & Darwish, M. & Ertogral, K., 2008. "The joint economic lot sizing problem: Review and extensions," European Journal of Operational Research, Elsevier, vol. 185(2), pages 726-742, March.
  22. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
  23. Gérard P. Cachon & Fuqiang Zhang, 2006. "Procuring Fast Delivery: Sole Sourcing with Information Asymmetry," Management Science, INFORMS, vol. 52(6), pages 881-896, June.
  24. Glock, Christoph H., 2012. "The joint economic lot size problem: A review," International Journal of Production Economics, Elsevier, vol. 135(2), pages 671-686.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:253:y:2016:i:3:p:711-733. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.