Contracting to Share Bilateral Information in Supply Chain

Abstract

This paper investigates the problem of information sharing under bilateral asymmetric information environment. More specifically, we consider a supply chain consisting of one risk-neural manufacturer and one risk-neural retailer for an innovation product. In order to facilitate the cooperation, the manufacturer and the retailer agree to share their private information that is known from the finished sample product. We give a relational contract specified the trading quantity and the corresponding transfer payments. We show that the wholesale price relational contract cannot induce the two parties to share their information truthfully and analyze how the false information affects the supply chain’s profit. In order to create sufficient incentives and internalize the supply chain’s objective, we design a new set of transfer payments specified the allocation rule based on the two parties’ information rents. We show that the relational contract with the new transfer payments can achieve truthful information revealing and allocate the ex post profit reasonably.