IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v65y2019i3p1305-1321.html
   My bibliography  Save this article

Dynamic Relational Contracts for Quality Enforcement in Supply Chains

Author

Listed:
  • Mariya Bondareva

    (Motorola Solutions, Inc., Chicago, Illinois 60661)

  • Edieal Pinker

    (Yale School of Management, New Haven, Connecticut 06520)

Abstract

We model the interaction of a single buyer with a single supplier within a market in a developing country with homogeneous local suppliers and homogeneous buyers from developed nations. The buyer sources a product from a supplier and then inspects and sells it on the market, subject to quality standards such as regulations about chemical content. Suppliers decide how much effort to exert to ensure compliance with quality standards. Buyers are assumed to comply with contracts because they are based in countries with strong legal systems. We assume that legal enforcement of the supplier’s contractual obligations is not possible. We model the interaction between buyer and supplier as a repeated game in which the partnership can be terminated by the buyer if the supplier refuses to pay penalties for quality violations. After termination, the buyer and supplier each search for a new business partner. We model the interaction between buyer and supplier using relational contacts in which penalties for quality failures are set so that the supplier voluntarily pays them. We show that optimal relational contracts have dynamic form in this setting because the value of the outside option available to the parties, if the relationship is terminated, is determined by the contract terms. We characterize the properties of the optimal dynamic equilibria and analyze the use of third-party quality certifications within this framework.

Suggested Citation

  • Mariya Bondareva & Edieal Pinker, 2019. "Dynamic Relational Contracts for Quality Enforcement in Supply Chains," Management Science, INFORMS, vol. 65(3), pages 1305-1321, March.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:3:p:1305-1321
    DOI: 10.1287/mnsc.2017.2990
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2017.2990
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2017.2990?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. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, April.
    2. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    3. Singer, Marcos & Donoso, Patricio & Traverso, Pedro, 2003. "Quality strategies in supply chain alliances of disposable items," Omega, Elsevier, vol. 31(6), pages 499-509, December.
    4. Gary H. Chao & Seyed M. R. Iravani & R. Canan Savaskan, 2009. "Quality Improvement Incentives and Product Recall Cost Sharing Contracts," Management Science, INFORMS, vol. 55(7), pages 1122-1138, July.
    5. Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2000. "Information, Contracting, and Quality Costs," Management Science, INFORMS, vol. 46(6), pages 776-789, June.
    6. Iny Hwang & Suresh Radhakrishnan & Lixin (Nancy) Su, 2006. "Vendor Certification and Appraisal: Implications for Supplier Quality," Management Science, INFORMS, vol. 52(10), pages 1472-1482, October.
    7. Diane J. Reyniers & Charles S. Tapiero, 1995. "The Delivery and Control of Quality in Supplier-Producer Contracts," Management Science, INFORMS, vol. 41(10), pages 1581-1589, October.
    8. Huanxing Yang, 2013. "Nonstationary Relational Contracts With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 525-547, May.
    9. Volodymyr Babich & Christopher S. Tang, 2012. "Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 301-314, April.
    10. Erica L. Plambeck & Terry A. Taylor, 2006. "Partnership in a Dynamic Production System with Unobservable Actions and Noncontractible Output," Management Science, INFORMS, vol. 52(10), pages 1509-1527, October.
    11. Tunay I. Tunca & Stefanos A. Zenios, 2006. "Supply Auctions and Relational Contracts for Procurement," Manufacturing & Service Operations Management, INFORMS, vol. 8(1), pages 43-67, February.
    12. Lyles, Marjorie A., 2008. "Appreciating cultural differences in China: An interview with Robert A. Eckert, Chairperson of the Board and CEO of Mattel, Inc," Business Horizons, Elsevier, vol. 51(6), pages 463-468.
    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. Chen, Jing & Wei, Hang & Xu, Shujun & Zheng, Chaonan, 2023. "The value of product recall insurance in a price competition with financially constrained suppliers," European Journal of Operational Research, Elsevier, vol. 307(3), pages 1161-1176.
    2. Gao, Ruoxin & Yao, Shiqing & Yang, Ruina, 2024. "Responsible audit and consumer awareness under collusion risk," European Journal of Operational Research, Elsevier, vol. 314(2), pages 466-476.
    3. Jing Chen & Hang Wei & Lei Xie, 2022. "Mitigating Product Quality Risk under External Financial Pressure: Inspection, Insurance, and Cash/Collateralized Loan," Production and Operations Management, Production and Operations Management Society, vol. 31(1), pages 304-317, January.
    4. He, Yong & Zhao, Xuan & Krishnan, Harish & Jin, Shibo, 2022. "Cooperation among suppliers of complementary products in repeated interactions," International Journal of Production Economics, Elsevier, vol. 252(C).
    5. Junhai Ma & Jiecai Chen & Yuxin Liu, 2022. "Research on optimization of food supply chain considering product traceability recall and safety investment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3953-3972, December.
    6. Chunyu Li & Peng Xing & Yanting Li, 2022. "Sustainable Strategy Analysis: Platform Channel Configuration and Slotting Fee Design under Differentiated Quality Investment," Sustainability, MDPI, vol. 14(23), pages 1-28, December.
    7. Yonatan Gur & Gregory Macnamara & Daniela Saban, 2022. "Sequential Procurement with Contractual and Experimental Learning," Management Science, INFORMS, vol. 68(4), pages 2714-2731, April.
    8. Basak Kalkanci & Erica L. Plambeck, 2020. "Managing Supplier Social and Environmental Impacts with Voluntary Versus Mandatory Disclosure to Investors," Management Science, INFORMS, vol. 66(8), pages 3311-3328, August.

    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. Aadhaar Chaturvedi, 2021. "Excessive Competition and Supplier Non‐Performance Risk: Trade‐offs in Reverse Auctions," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 3073-3093, September.
    2. Yang Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2013. "Quality Assurance Contracts in a Multi-Level Supply Chain," Working Papers 0206mss, College of Business, University of Texas at San Antonio.
    3. DeYong, Gregory D. & Pun, Hubert, 2015. "Is dishonesty the best policy? Supplier behaviour in a multi-tier supply chain," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 1-13.
    4. Jing Chen & Hang Wei & Lei Xie, 2022. "Mitigating Product Quality Risk under External Financial Pressure: Inspection, Insurance, and Cash/Collateralized Loan," Production and Operations Management, Production and Operations Management Society, vol. 31(1), pages 304-317, January.
    5. Li Chen & Hau L. Lee, 2017. "Sourcing Under Supplier Responsibility Risk: The Effects of Certification, Audit, and Contingency Payment," Management Science, INFORMS, vol. 63(9), pages 2795-2812, September.
    6. Hong Wan & Xiaowei Xu & Tian Ni, 2013. "The incentive effect of acceptance sampling plans in a supply chain with endogenous product quality," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(2), pages 111-124, March.
    7. Dionisia Tzavara and Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," EUI-RSCAS Working Papers 16, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    8. Pei†Cheng Liao & Suresh Radhakrishnan, 2013. "A Commitment†Based Explanation for Outsourcing Multiple Tasks," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 1063-1081, September.
    9. Li, Dong & Nagurney, Anna, 2015. "A general multitiered supply chain network model of quality competition with suppliers," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 336-356.
    10. Dionisia Tzavara & Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," RSCAS Working Papers 2011/16, European University Institute.
    11. Mohammad E. Nikoofal & Mehmet Gümüş, 2018. "Quality at the Source or at the End? Managing Supplier Quality Under Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 498-516, July.
    12. Tzavara Dionisia & Heritier Adrienne, 2012. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," Business and Politics, De Gruyter, vol. 14(2), pages 1-24, August.
    13. Xie, Gang & Wang, Shouyang & Lai, K.K., 2011. "Quality improvement in competing supply chains," International Journal of Production Economics, Elsevier, vol. 134(1), pages 262-270, November.
    14. Murat Erkoc & Haresh Gurnani & Saibal Ray & Mingzhu Jin, 2023. "Quality investment, inspection policy, and pricing decisions in a decentralized supply chain," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 207-226, January.
    15. Xin Fang & Soo-Haeng Cho, 2020. "Cooperative Approaches to Managing Social Responsibility in a Market with Externalities," Manufacturing & Service Operations Management, INFORMS, vol. 22(6), pages 1215-1233, November.
    16. Ying‐Ju Chen & Mingcherng Deng, 2013. "Supplier certification and quality investment in supply chains," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(3), pages 175-189, April.
    17. Andrew M. Davis & Kyle Hyndman, 2018. "An Experimental Investigation of Managing Quality Through Monetary and Relational Incentives," Management Science, INFORMS, vol. 64(5), pages 2345-2365, May.
    18. Chakraborty, Tulika & Chauhan, Satyaveer S. & Ouhimmou, Mustapha, 2019. "Cost-sharing mechanism for product quality improvement in a supply chain under competition," International Journal of Production Economics, Elsevier, vol. 208(C), pages 566-587.
    19. Yan Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2016. "Quality Management in Multi-Level Supply Chains with Outsourced Manufacturing," Production and Operations Management, Production and Operations Management Society, vol. 25(2), pages 290-305, February.
    20. Liying Mu & Milind Dawande & Xianjun Geng & Vijay Mookerjee, 2016. "Milking the Quality Test: Improving the Milk Supply Chain Under Competing Collection Intermediaries," Management Science, INFORMS, vol. 62(5), pages 1259-1277, May.

    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:65:y:2019:i:3:p:1305-1321. See general information about how to correct material in RePEc.

    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: Chris Asher (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. RePEc uses bibliographic data supplied by the respective publishers.