Information Sharing in a Supply Chain: Using Agency Theory to Guide the Design of Incentives

Abstract

Sharing accurate and timely supply and demand information throughout a supply chain can yield significant performance improvements to all members of the supply chain. Despite the benefits, many firms are reluctant to share information with their supply chain partners due to an unequal distribution of risks, costs, and benefits among the partners. The information shared will usually benefit the recipient, yet the majority of costs will be incurred by the provider. Many firms are also reluctant to share information due to the risk of it being divulged to competitors or used for opportunistic bargaining. This paper uses agency theory to (1) help explain the reasons firms are reluctant to share information and (2) guide the design of incentives to redistribute risk and encourage information sharing in a supply chain. A principal-agent model is described that suggests traditional fixed payment incentives or investments are insufficient for ensuring timely and accurate sharing of information. Instead, a mix of profit sharing, payments for sharing forecasts, and nonmonetary incentives is required. Using the model, managers can examine the feasibility of information sharing in their supply chain and devise appropriate strategies to manage and redistribute the risks, costs, and benefits among their supply chain partners. This paper also makes an important contribution to the literature by re-examining the role of agency theory in supply chain information sharing.