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Dynamic Relational Contracts for Quality Enforcement in Supply Chains

Author

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  • 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
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    References listed on IDEAS

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    Cited by:

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    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.

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