Product innovation in a supply chain with information asymmetry: Is more private information always worse?

Abstract

This study investigates supply chain innovation under different degrees of information asymmetry. The supplier could be uncertain about either the manufacturer's production cost or innovation capability, or both, leading to the existence of relatively less or more private information that can distort innovation investment. We find that the effects of different degrees of information asymmetry on supply chain innovation can be complicated. While information asymmetry can often cause underinvestment in innovation, such an underinvestment problem could be substantially mitigated with more private information, and even more so when customer demand is sensitive to price. This counter-intuitive finding can be understood as a consequence of the relatively stronger innovation-motivation motive but weaker profit-extraction motive of the supplier facing more private information. We further examine the effects of CSR undertaking in supply chain, and show that the underinvestment in innovation would still deteriorate with less private information. Thus, one should be cautious towards information sharing schemes that partially reduce information asymmetry of supply chain.