IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v64y2018i8p3690-3713.html
   My bibliography  Save this article

Designing Incentive Systems for Truthful Forecast Information Sharing Within a Firm

Author

Listed:
  • Lisa M. Scheele

    (Department of Supply Chain Management and Management Science, University of Cologne, 50923 Cologne, Germany)

  • Ulrich W. Thonemann

    (Department of Supply Chain Management and Management Science, University of Cologne, 50923 Cologne, Germany)

  • Marco Slikker

    (School of Industrial Engineering, Eindhoven University of Technology, 5600 MB Eindhoven, Netherlands)

Abstract

We consider a firm where the sales division ( Sales ) is responsible for demand forecasting and the operations division ( Operations ) is responsible for ordering. Sales has better information about the demand than Operations and sends a nonbinding demand forecast to Operations . To incentivize truthful information sharing, we include a forecast error penalty in the incentive system of Sales . Besides monetary payoffs, we also add behavioral factors to the utility function of Sales . We model the setting as a signaling game and derive the Pareto-dominant separating equilibria of the game. In laboratory experiments, we observe human behavior that is in line with the predictions of the behavioral model but deviates substantially from expected-payoff-maximizing behavior. We use the behavioral model to design incentive systems for truthful information sharing and validate the approach in an experiment with out-of-sample treatments and out-of-sample subjects. We conduct additional experiments to provide further robustness to the results.

Suggested Citation

  • Lisa M. Scheele & Ulrich W. Thonemann & Marco Slikker, 2018. "Designing Incentive Systems for Truthful Forecast Information Sharing Within a Firm," Management Science, INFORMS, vol. 64(8), pages 3690-3713, August.
  • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:8:p:3690-3713
    DOI: 10.1287/mnsc.2017.2805
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2017.2805
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.2017.2805?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Elena Katok & Diana Yan Wu, 2009. "Contracting in Supply Chains: A Laboratory Investigation," Management Science, INFORMS, vol. 55(12), pages 1953-1968, December.
    2. David Kelsey & Sara Roux, 2015. "An experimental study on the effect of ambiguity in a coordination game," Theory and Decision, Springer, vol. 79(4), pages 667-688, December.
    3. Charness, Gary & Dufwenberg, Martin, 2003. "Promises & Partnership," Research Papers in Economics 2003:3, Stockholm University, Department of Economics.
    4. Lode Li & Hongtao Zhang, 2008. "Confidentiality and Information Sharing in Supply Chain Coordination," Management Science, INFORMS, vol. 54(8), pages 1467-1481, August.
    5. Guido Voigt & Karl Inderfurth, 2012. "Supply chain coordination with information sharing in the presence of trust and trustworthiness," IISE Transactions, Taylor & Francis Journals, vol. 44(8), pages 637-654.
    6. Axel Ockenfels & Dirk Sliwka & Peter Werner, 2015. "Bonus Payments and Reference Point Violations," Management Science, INFORMS, vol. 61(7), pages 1496-1513, July.
    7. Teck-Hua Ho & Noah Lim & Tony Haitao Cui, 2010. "Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis," Management Science, INFORMS, vol. 56(11), pages 1891-1910, November.
    8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    9. Katok, Elena, 2011. "Using Laboratory Experiments to Build Better Operations Management Models," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 5(1), pages 1-86, November.
    10. Uri Gneezy, 2005. "Deception: The Role of Consequences," American Economic Review, American Economic Association, vol. 95(1), pages 384-394, March.
    11. Vishal Gaur & Avi Giloni & Sridhar Seshadri, 2005. "Information Sharing in a Supply Chain Under ARMA Demand," Management Science, INFORMS, vol. 51(6), pages 961-969, June.
    12. Lundquist, Tobias & Ellingsen, Tore & Gribbe, Erik & Johannesson, Magnus, 2009. "The aversion to lying," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 81-92, May.
    13. Morris A. Cohen & Teck H. Ho & Z. Justin Ren & Christian Terwiesch, 2003. "Measuring Imputed Cost in the Semiconductor Equipment Supply Chain," Management Science, INFORMS, vol. 49(12), pages 1653-1670, December.
    14. Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
    15. McKenzie, Jordi, 2011. "Mean absolute percentage error and bias in economic forecasting," Economics Letters, Elsevier, vol. 113(3), pages 259-262.
    16. Jürgen Eichberger & David Kelsey & Burkhard Schipper, 2008. "Granny Versus Game Theorist: Ambiguity in Experimental Games," Theory and Decision, Springer, vol. 64(2), pages 333-362, March.
    17. Özalp Özer & Wei Wei, 2006. "Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information," Management Science, INFORMS, vol. 52(8), pages 1238-1257, August.
    18. Fangruo Chen & Guoming Lai & Wenqiang Xiao, 2016. "Provision of Incentives for Information Acquisition: Forecast-Based Contracts vs. Menus of Linear Contracts," Management Science, INFORMS, vol. 62(7), pages 1899-1914, July.
    19. Yinghao Zhang & Karen Donohue & Tony Haitao Cui, 2016. "Contract Preferences and Performance for the Loss-Averse Supplier: Buyback vs. Revenue Sharing," Management Science, INFORMS, vol. 62(6), pages 1734-1754, June.
    20. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    21. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    22. Gary Charness & Martin Dufwenberg, 2006. "Promises and Partnership," Econometrica, Econometric Society, vol. 74(6), pages 1579-1601, November.
    23. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
    24. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    25. Z. Justin Ren & Morris A. Cohen & Teck H. Ho & Christian Terwiesch, 2010. "Information Sharing in a Long-Term Supply Chain Relationship: The Role of Customer Review Strategy," Operations Research, INFORMS, vol. 58(1), pages 81-93, February.
    26. Sridhar Balasubramanian & Pradeep Bhardwaj, 2004. "When Not All Conflict Is Bad: Manufacturing-Marketing Conflict and Strategic Incentive Design," Management Science, INFORMS, vol. 50(4), pages 489-502, April.
    27. Camerer, Colin & Weber, Martin, 1992. "Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-370, October.
    28. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, vol. 93(1), pages 133-149, March.
    29. Mailath, George J. & von Thadden, Ernst-Ludwig, 2013. "Incentive compatibility and differentiability: New results and classic applications," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1841-1861.
    30. Christoph Vanberg, 2008. "Why Do People Keep Their Promises? An Experimental Test of Two Explanations -super-1," Econometrica, Econometric Society, vol. 76(6), pages 1467-1480, November.
    31. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
    32. Fangruo Chen, 2005. "Salesforce Incentives, Market Information, and Production/Inventory Planning," Management Science, INFORMS, vol. 51(1), pages 60-75, January.
    33. Maurice E. Schweitzer & Gérard P. Cachon, 2000. "Decision Bias in the Newsvendor Problem with a Known Demand Distribution: Experimental Evidence," Management Science, INFORMS, vol. 46(3), pages 404-420, March.
    34. Pulford, Briony D. & Colman, Andrew M., 2007. "Ambiguous games: Evidence for strategic ambiguity aversion," MPRA Paper 86345, University Library of Munich, Germany.
    35. Teck-Hua Ho & Juanjuan Zhang, 2008. "Designing Pricing Contracts for Boundedly Rational Customers: Does the Framing of the Fixed Fee Matter?," Management Science, INFORMS, vol. 54(4), pages 686-700, April.
    36. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    37. Hyoduk Shin & Tunay I. Tunca, 2010. "Do Firms Invest in Forecasting Efficiently? The Effect of Competition on Demand Forecast Investments and Supply Chain Coordination," Operations Research, INFORMS, vol. 58(6), pages 1592-1610, December.
    38. Albers, Sonke, 1996. "Optimization models for salesforce compensation," European Journal of Operational Research, Elsevier, vol. 89(1), pages 1-17, February.
    39. Kyle Hyndman & Santiago Kraiselburd & Noel Watson, 2013. "Aligning Capacity Decisions in Supply Chains When Demand Forecasts Are Private Information: Theory and Experiment," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 102-117, March.
    40. Nava Ashraf & Iris Bohnet & Nikita Piankov, 2006. "Decomposing trust and trustworthiness," Experimental Economics, Springer;Economic Science Association, vol. 9(3), pages 193-208, September.
    41. Christoph H. Loch & Yaozhong Wu, 2008. "Social Preferences and Supply Chain Performance: An Experimental Study," Management Science, INFORMS, vol. 54(11), pages 1835-1849, November.
    42. Özalp Özer & Upender Subramanian & Yu Wang, 2018. "Information Sharing, Advice Provision, or Delegation: What Leads to Higher Trust and Trustworthiness?," Management Science, INFORMS, vol. 64(1), pages 474-493, January.
    43. Michael Becker-Peth & Elena Katok & Ulrich W. Thonemann, 2013. "Designing Buyback Contracts for Irrational But Predictable Newsvendors," Management Science, INFORMS, vol. 59(8), pages 1800-1816, August.
    44. Tony Haitao Cui & Jagmohan S. Raju & Z. John Zhang, 2007. "Fairness and Channel Coordination," Management Science, INFORMS, vol. 53(8), pages 1303-1314, August.
    45. Gneezy, Uri & Rockenbach, Bettina & Serra-Garcia, Marta, 2013. "Measuring lying aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 293-300.
    46. Ruomeng Cui & Gad Allon & Achal Bassamboo & Jan A. Van Mieghem, 2015. "Information Sharing in Supply Chains: An Empirical and Theoretical Valuation," Management Science, INFORMS, vol. 61(11), pages 2803-2824, November.
    47. Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.
    48. Özalp Özer & Yanchong Zheng & Kay-Yut Chen, 2011. "Trust in Forecast Information Sharing," Management Science, INFORMS, vol. 57(6), pages 1111-1137, June.
    49. Özalp Özer & Yanchong Zheng & Yufei Ren, 2014. "Trust, Trustworthiness, and Information Sharing in Supply Chains Bridging China and the United States," Management Science, INFORMS, vol. 60(10), pages 2435-2460, October.
    50. Christian Terwiesch & Z. Justin Ren & Teck H. Ho & Morris A. Cohen, 2005. "An Empirical Analysis of Forecast Sharing in the Semiconductor Equipment Supply Chain," Management Science, INFORMS, vol. 51(2), pages 208-220, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Emily W. Choi & Özalp Özer & Yanchong Zheng, 2020. "Network Trust and Trust Behaviors Among Executives in Supply Chain Interactions," Management Science, INFORMS, vol. 66(12), pages 5823-5849, December.
    2. Hong, Xianpei & Cao, Xinlu & Gong, Yeming & Chen, Wanying, 2021. "Quality information acquisition and disclosure with green manufacturing in a closed-loop supply chain," International Journal of Production Economics, Elsevier, vol. 232(C).
    3. Li, Xiaolin & Özer, Özalp & Subramanian, Upender, 2021. "Are we strategically naïve or guided by trust and trustworthiness in cheap-talk communication?," LSE Research Online Documents on Economics 107103, London School of Economics and Political Science, LSE Library.
    4. Karen Donohue & Özalp Özer, 2020. "Behavioral Operations: Past, Present, and Future," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 191-202, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Li, Xiaolin & Özer, Özalp & Subramanian, Upender, 2021. "Are we strategically naïve or guided by trust and trustworthiness in cheap-talk communication?," LSE Research Online Documents on Economics 107103, London School of Economics and Political Science, LSE Library.
    2. Karen Donohue & Özalp Özer, 2020. "Behavioral Operations: Past, Present, and Future," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 191-202, January.
    3. Özalp Özer & Yanchong Zheng & Yufei Ren, 2014. "Trust, Trustworthiness, and Information Sharing in Supply Chains Bridging China and the United States," Management Science, INFORMS, vol. 60(10), pages 2435-2460, October.
    4. Yinghao Zhang & Karen Donohue & Tony Haitao Cui, 2016. "Contract Preferences and Performance for the Loss-Averse Supplier: Buyback vs. Revenue Sharing," Management Science, INFORMS, vol. 62(6), pages 1734-1754, June.
    5. Özalp Özer & Upender Subramanian & Yu Wang, 2018. "Information Sharing, Advice Provision, or Delegation: What Leads to Higher Trust and Trustworthiness?," Management Science, INFORMS, vol. 64(1), pages 474-493, January.
    6. Yan, Nina & Xu, Xun & Huang, Wenyi, 2021. "Supplier's capacity investment strategy with factoring finance," International Journal of Production Economics, Elsevier, vol. 238(C).
    7. Özalp Özer & Yanchong Zheng & Kay-Yut Chen, 2011. "Trust in Forecast Information Sharing," Management Science, INFORMS, vol. 57(6), pages 1111-1137, June.
    8. Becker-Peth, Michael & Thonemann, Ulrich W., 2016. "Reference points in revenue sharing contracts—How to design optimal supply chain contracts," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1033-1049.
    9. Bernd Irlenbusch & Janna Ter Meer, 2015. "Lying in public good games with and without punishment," Cologne Graduate School Working Paper Series 06-02, Cologne Graduate School in Management, Economics and Social Sciences.
    10. Leon Yang Chu & Noam Shamir & Hyoduk Shin, 2017. "Strategic Communication for Capacity Alignment with Pricing in a Supply Chain," Management Science, INFORMS, vol. 63(12), pages 4366-4377, December.
    11. Emily W. Choi & Özalp Özer & Yanchong Zheng, 2020. "Network Trust and Trust Behaviors Among Executives in Supply Chain Interactions," Management Science, INFORMS, vol. 66(12), pages 5823-5849, December.
    12. Andrew M. Davis & Elena Katok & Natalia Santamaría, 2014. "Push, Pull, or Both? A Behavioral Study of How the Allocation of Inventory Risk Affects Channel Efficiency," Management Science, INFORMS, vol. 60(11), pages 2666-2683, November.
    13. Tony Haitao Cui & Guangwen Kong & Behrooz Pourghannad, 2020. "Is Simplicity the Ultimate Sophistication? The Superiority of Linear Pricing," Production and Operations Management, Production and Operations Management Society, vol. 29(7), pages 1767-1788, July.
    14. Dwenger, Nadja & Lohse, Tim, 2019. "Do individuals successfully cover up their lies? Evidence from a compliance experiment," Journal of Economic Psychology, Elsevier, vol. 71(C), pages 74-87.
    15. Khalmetski, Kiryl, 2019. "Evasion of guilt in expert advice," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 296-310.
    16. Bin Shen & Hau-Ling Chan, 2017. "Forecast Information Sharing for Managing Supply Chains in the Big Data Era: Recent Development and Future Research," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(01), pages 1-26, February.
    17. Erin L. Krupka & Stephen Leider & Ming Jiang, 2017. "A Meeting of the Minds: Informal Agreements and Social Norms," Management Science, INFORMS, vol. 63(6), pages 1708-1729, June.
    18. Rosaz, Julie & Villeval, Marie Claire, 2012. "Lies and biased evaluation: A real-effort experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 537-549.
    19. Shan Li & Kay-Yut Chen & Ying Rong, 2020. "The Behavioral Promise and Pitfalls in Compensating Store Managers," Management Science, INFORMS, vol. 66(10), pages 4899-4919, October.
    20. Grolleau, Gilles & Kocher, Martin G. & Sutan, Angela, 2014. "Cheating and loss aversion: do people lie more to avoid a loss?," Discussion Papers in Economics 21387, University of Munich, Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:64:y:2018:i:8:p:3690-3713. 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: . General contact details of provider: https://edirc.repec.org/data/inforea.html .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Matthew Walls (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.