Contractual Commitments Research Articles

Put a bet on it: Can self-funded commitment contracts curb fitness procrastination?

We investigate the use of a highly scalable intervention to help individuals achieve their physical activity goals: self-funded commitment contracts. Using a randomised experiment, we compare the effect of soft (non-incentivised) and hard (incentivised) contracts among 1629 members of a gym in Stockholm, Sweden. We find a significant positive impact of being offered a hard contract on monthly visits to the gym and the probability of meeting one’s contract goal. Relative to the control group, being offered a hard contract significantly increases gym visits by 21%, while being offered a soft contract leads to an 8% increase.

Applying fixed order commitment contracts in a capacitated supply chain

Demand uncertainty can lead to excess inventory holdings, capacity creation, emergency deliveries, and stock-outs. The costs of demand uncertainty may be directly borne by upstream suppliers, but can propagate downstream in the form of higher prices. To address these problems, we investigate a practical application of a fixed order commitment contract (FOCC) in which a manufacturer commits to a minimum fixed order quantity each period and receives a per unit price discount from the supplier for the commitment. We model a FOCC as a Stackelberg game in which the supplier offers a price discount anticipating the manufacturer’s response, and the manufacturer subsequently decides on the optimal commitment quantity. We show that a FOCC can smooth the orders received by the supplier, mitigating the negative consequences of demand uncertainty for the supplier, the manufacturer, and the supply chain. We extend the current literature by solving for an endogenous price discount instead of treating it as an exogenous value, and validate our model insights with our research partner, a large international materials handling equipment manufacturer. Using data on 863 parts, we evaluate the relationships between the model parameters, contract parameters, and the contract effectiveness, and show the conditions under which the FOCC generates greater cost savings for both the manufacturer and supplier. Our results help operations managers better understand how to obtain the optimal contract parameters for a FOCC and the circumstances under which such a contract is most beneficial for the company and its supply chain.

Putting the Theatre Green Book into practice: sustainability, pedagogy and the conservatoire

Like all industries, theatre must face the challenge of transitioning to a sustainable future, and in 2021 the Theatre Green Book was created to support that transition. It is now being used widely in the UK including by the National Theatre who are committed to working to the standards of the Theatre Green Book and have included engagement with this process as a contractual commitment for all staff and freelancers. Theatre educators are responsible for not only ensuring that their shows are made sustainably, but also for embedding this way of working into curriculums. Case studies that look at the use of the Theatre Green Book in theatres are now materialising, but there is no wider research currently available about its application within drama schools. This article explores the barriers and motivators that impact the implementation of the Theatre Green Book method into UK drama schools. Four semi-structured interviews with theatre production educators and transcripts from three Theatre Green Book educator meetings were used to provide an overview of the barriers and motivators. Several key themes emerged from the data, including pressures of time, leadership and storage, and recommendations are made to address them.

Optimal wind power capacity decision consider commitment contracts under uncertain power supply and electricity demand in China

China has been introducing reforms in the electricity market. Since 2016, electricity retailers are allowed to operate in the market once monopolized by traditional power companies. This regulatory environment demands new types of purchase contracts to remunerate the energy agents and deliver better prices for consumers fairly and sustainably. This paper proposes two new electricity purchase contracts with risk sharing mechanism and studies on wind power supplier's optimal capacity investment problem under supply and demand uncertainty. Firstly, a basic model for fixed demand contract is developed, and the optimal capacity is obtained. Secondly, the fixed commitment order contract and the forecast order contract with risk sharing mechanism are proposed to manage the fluctuation of wind power supply randomness. With backward induction, the optimal investment capacity of wind power supplier is solved, and then the fixed order quantity or forecast demand quantity of the electricity retailer can be obtained. Our results show that the fixed order quantity may have a positive influence on the wind power supplier's capacity investment decision. While, the forecast order quantity may have a negative influence on the wind power supplier's capacity investment decision. In addition, wind density has a strong influence on wind power capacity investment, and it has a positive impact on wind power supplier's profit, but it does not always have a positive impact on electricity retailer's profit. At last, based on numerical analysis, we examine how the wind density distribution coefficient change affect members' profit in the electricity supply chain. We also find that even with wind curtailment punishment, the forecast order contract can make a Pareto improvement on the whole electricity supply chain.

Socially responsible investment: Ex-ante contracting or ex-post bargaining?

This paper shows how a socially and environmentally aware firm principal can motivate a profit-oriented manager to pursue positive environmental, social, and governance (ESG) outcomes. In the model, the manager produces a verifiable output that creates social costs but also engages in an unverifiable output that promotes ESG. The paper demonstrates that an ex-post bargaining contract is preferred to an ex-ante commitment contract if the unverifiable output substantially improves ESG or if there exist substantial social costs. The paper also examines how social impact bonds can be more effective than short-term debt when used to finance social programs.

Do customers matter in currency hedging policies? Evidence from product warranties

AbstractUsing a data set of US manufacturing firms with sales from foreign operations, we find that firms' currency hedging activities vary with their warranty obligations. The positive link of warranty obligations to currency hedging policies prevails in financially more constrained firms, companies facing fiercer product market competition and corporations producing more unique products. Our results suggest that firms are likely to incorporate their contractual commitments to customers into their currency hedging activities, especially when their failures to honor these commitments are more likely or costly.

Strategic inventory in semi-conductor supply chains under industrial disruption

The semiconductor industry plays a crucial role in modern technology and the global economy. Over the past few years, it has experienced a series of supply disruptions, leading to significantly adverse impacts on the global economy. Holding strategic inventory is a common strategy adopted by industries to address supply disruptions, but the specific mechanisms and distinctions of its effects from those in traditional supply chain scenarios remain unclear. To explore the impact of strategic inventory in the semiconductor supply chain during industrial disruptions, we establish four game models for the following scenarios: (1) no strategic inventory with no supply disruption (NN), (2) no strategic inventory with supply disruption (ND), (3) strategic inventory with commitment contracts and supply disruption (SCD), and (4) strategic inventory with dynamic contracts and supply disruption (SDD). Firstly, we examine how the supply disruption impacts the overall performance of the semiconductor supply chain and its members. Secondly, we investigate the role of strategic inventory under commitment contracts and dynamic contracts in mitigating the effects of supply disruptions. We compare the preferences of the supply chain parties for the two types of contracts and identify potential equilibrium strategies. Our study reveals several interesting conclusions: (1) Supply disruptions adversely affect the overall performance of the semiconductor supply chain and its members. (2) Even if the manufacturer implements a commitment contract, the retailer will still choose to maintain strategic inventory. (3) When the probability of disruptions is relatively high, the retailer may maintain a higher level of strategic inventory under a commitment contract compared to a dynamic contract. (4) The use of dynamic contract results in superior mitigation of supply disruptions compared to the commitment contract, leading to greater benefits for the entire supply chain and its participants. (5) In dynamic contracts, the retailer may incur losses from holding strategic inventory in specific situations.

Bargaining in mobile app supply chain considering members’ fairness concern attitudes

The fast-developing mobile app industry has brought challenges to service pricing and profit allocation problems. This study constructs a four-stage game model consisting of a brand mobile app supplier as well as a distributor and takes members’ distributional fairness concern into consideration. We analyze the equilibrium revenue retaining ratio bargaining result, service price as well as the investigation and regulation (I&R) level in different fairness concern models and explore the managers’ employment decisions of supply chain members at equilibrium. Through analysis, we obtain several theoretical contributions and managerial insights. Firstly, while the supplier’s distributional fairness concern drops down both the service price and I&R level, the distributor’s fairness concern exerts no effect on both decisions. Secondly, we show that at equilibrium, the supply chain members would sink into prisoner’s dilemma when the cost coefficient of I&R activity is relatively low. When the cost coefficient is relatively high, the supplier would obtain higher profit while the distributor would suffer profit loss compared with fairness neutral situation and unfortunately the profit gain of the supplier is overwhelmed by the profit loss of the distributor, resulting profit loss of the whole supply chain. Thirdly, we suggest the distributor in mobile app supply chain to control I&R cost for the purpose of attracting the supplier to sign fairness neutral commitment contract, which can avoid supply chain inefficiency. Besides, the government is advised to take intervention measures when the I&R cost coefficient is relatively high.

Imposing commitment to rein in overconfidence in learning

A rational principal delegates learning to an overconfident agent who overestimates the precision of the information he collects. The principal chooses between two contracts: commitment, in which the agent commits to the duration of learning in advance, and flexible, in which the agent decides when to stop learning in real time. When the agent is sufficiently overconfident, the principal optimally ties the agent's hands by offering him the commitment contract. When the principal can choose both the contract and the agent's level of overconfidence, selecting the rational agent is suboptimal when the cost of learning is sufficiently high.

Investment in the Mining Sector: Revisiting the Challenges and Prospects in Tanzania

This article analyses the legal and regulatory frameworks regulating investment in the mining sector. The article notes that the Tanzanian mining sector has undergone various policy and legislative developments geared towards ensuring that the mining sector contributes greatly to national development. This article finds challenges in creating an investment-enabling environment as stipulated in the Mineral Policy 2009. The article advances the argument that Tanzania’s mining legal regime poses various challenges which affect the government’s ability to strike a balance between its interests to maximise revenue and protect the interests of the investors. In that regard, the article concludes that there is a need for amendments to essential laws governing mining investments in Tanzania to ensure that the rules align with Tanzania’s contractual commitments with the investors. As such, it recommends that the legislative changes to ensure the balance between the need to maximise benefits from natural resources and the protection of investors following the obligations that Tanzania has freely agreed to under international agreements cannot be overemphasised.

Commitment Contracts with Action Constraints

Commitment Contracts with Action Constraints

Exploring Innovative Applications of Behavioral Economic Theories to Enhance Eczema Care and Outcomes

This study explores the innovative application of behavioral economic theories to enhance eczema care and improve patient outcomes. The research focuses on three potent strategies within the realm of behavioral economics: nudging, financial incentives, and digital interventions with commitment contracts. Incorporating financial incentives into eczema care can potentially bolster medication adherence, a critical component in effectively managing the chronic trajectory of this condition. By providing tangible rewards or incentives, patients may be motivated to adhere to prescribed treatment regimens more consistently. Furthermore, this paper underscores the transformative potential of digital interventions, particularly commitment contracts, in cultivating proactive and patient-centered approaches to disease management. Leveraging technology, these interventions have the potential to revolutionize healthcare delivery by promoting enhanced adherence and facilitating personalized and effective treatment paradigms. This research is grounded in a comprehensive review of contemporary studies, offering valuable insights into the effectiveness of these strategies. The findings of this study paint a promising picture for the future of eczema management, suggesting that the integration of behavioral economic principles can lead to more effective and patient-centric care, ultimately improving outcomes for individuals living with eczema.

When and how to introduce upstream competition in an innovation supply chain

Considering an innovation supply chain with a primary supplier involvement in the new product development of a downstream manufacturer who sells to consumers, we address when and how to introduce a secondary supplier by applying order commitment besides innovation quality-dependent contract and revenue-sharing contract. Our results show that the secondary supplier should be invited after the new product development is achieved. The innovation quality-dependent order commitment contract can improve the innovation quality of the supply chain. The innovation quality-dependent wholesale price contract warrants the supplier's innovation quality to keep the same level as the single-supplier supply chain and improves the primary supplier's profit. The incentive effect of a revenue-sharing contract on the supplier's innovation quality is more substantial when introducing a secondary supplier after new product development than before. Furthermore, the negative effect of the supplier's competition on innovation quality and profit of the manufacturer can be alleviated by wholesale price decision-making power consignment. We also provide rich managerial insights into supplier involvement in new product development practices by analyzing the equilibrium behaviors and numerically simulating significant decision variables concerning the demand sensitivity to innovation quality.

Banking regulation and costless commitment contracts for time-inconsistent agents

Behavioral economics modeling assumes that the contractible commitments valued by sophisticated time-inconsistent agents come at a cost. This paper challenges this assumption by arguing that it disregards the benefits that providers derive from supplying commitment-based products. In our equilibrium model, the commitment embedded in an illiquid savings product is valuable to both market sides. Although sophisticated time-inconsistent agents value the commitment, they do not have to pay for contracting it. The necessary and sufficient conditions for having a costless commitment contract in the savings market combine strong liquidity constraints imposed on banks and the occurrence of harmful shocks. Our results have regulatory implications for social finance.

Financing and coordination of the agricultural supply chain considering government-enterprise guarantee

We examine an agricultural supply chain consisting of a core enterprise and a capital constrained farmer and assess the yield uncertainty of farmer’s production. We explore two kinds of financing models: traditional bank financing and government-enterprise guarantee financing. To coordinate the supply chain, a price commitment contract and a revenue-sharing contract are considered. Our results show that no matter in bank or government-enterprise guarantee financing model, we can find the conditions for full coordination of the supply chain with any contract. However, in the government enterprise guarantee financing model, when a farmer has bankrupt risk in a low-yield season and no bankrupt risk in a high-yield season, the revenue-sharing contract can simultaneously make the supply chain fully coordinated and achieve Pareto improvement to maximize the profits of the entire supply chain and achieve a win-win situation. In addition, the farmer and enterprise prefer to choose the financing model with a higher promised price and a higher revenue-sharing ratio, and the social welfare under the government-enterprise guarantee financing model is higher than that under the traditional bank financing model.

Buyer–supplier partnerships and circular economy performance in food supply chains: Serial mediation by commitment contract and innovation performance

AbstractThe study investigates the impact of buyer–supplier partnerships on the performance of the circular economy (CE) in the food supply chain (FSC). Then, it also examines the effect of commitment contracts and innovation on the performance of the FSC. The research model is developed using behavioural economics concepts and collaborative theory. Furthermore, five research hypotheses are tested using samples from food manufacturers and other related supply chain partners. Covariance‐based structural equation modelling technique is used in this study, and necessary tests were done to ensure the high quality of findings. Buyer–supplier partnerships demonstrate both direct and indirect effects on the CE performance in FSC. The findings supported the serial mediation effect wherein buyer–supplier partnerships are found to exert their impact on the CE in FSC through commitment contracts and innovation performance in a successive way. The uniqueness of this study lies in the use of behavioural economics concepts to enhance CE performance. The study advances knowledge of commitment contracts by indicating whether and how it connects to CE performance results.

Perspectives of two competing manufacturers: customer rebate vs. contract mechanism

PurposeThis paper aims to analyze the potentials of dynamic, commitment and revenue-sharing contracts; that a nonrebate offering manufacturer can use to safeguard his profit while his competitor offers customer rebates in a supply chain consisting of two manufacturers and a common retailer.Design/methodology/approachWe consider a two-period supply chain model to explore optimal decisions under eight possible scenarios based on the contract and rebate offering decisions. Because the manufacturers are selling substitutable products, therefore, a customer rebate on one of the products negatively impacts the selling quantity of other. Optimal price, rebate, and quantities are examined and compared to explore the strategic choice for both the rebate offering and non-rebate offering manufacturer. Comparative evaluation is conducted to pinpoint how the parameters such as contract parameters and its nature affect the members.FindingsThe results demonstrate that all these contracts instigate the rebate offering manufacturer to provide a higher rebate, but do not ensure a higher profit. If the revenue sharing contract is offered to the common retailer, the effectiveness of the rebate program might reduce significantly, and the rebate offering manufacturer might receives lower profits. A non-rebate offering manufacturer might use a commitment contract to ensure higher profits for all the members and make sure the common retailer continues the product.Originality/valueThe effect of customer rebate vs. supply chain contract under competition has not yet been explored comprehensively. Therefore, the study contributes to the literature regarding interplay among pricing decision, contract choice and rebate promotion in a two-period setting. The conceptual and managerial insights contribute to a better understanding of strategic decision-making for both competing manufacturers under consumer rebates.

Automotive Procurement Under Opaque Prices: Theory with Evidence from the BMW Supply Chain

Several features of automotive procurement distinguish it from the prototypical supply chain in the academic literature: pass-through pricing that reimburses suppliers for raw material costs, market frictions that prohibit cost transparency and imbue suppliers with pricing power, and contractual commitments that span multiple production periods. In this context, we formalize a procurement model by considering an automaker that buys components from an upstream supplier to assemble cars over several production periods in an environment where period demands and raw material costs are both stochastic. Our paper clarifies how information asymmetry and market factors that amplify or weaken this asymmetry affect the firms’ procurement protocol preferences. Then, using proprietary contract and supplier data from BMW, we empirically validate this model and show that it reflects BMW’s reality: the factors that should theoretically go into automotive procurement decisions do so. Our analysis also reveals that existing contracting protocols in this context are not optimal for procurement under asymmetric information, and so we propose an alternative contracting method. We calibrate our model and estimate an automaker’s performance improvement from this optimal contract over the status quo. This paper was accepted by Vishal Gaur, operations management. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2023.4880 .

Best foot forward? The importance of contractual governance mechanisms for innovation from alliances

This paper examines the impact of alliance partners' ex ante governance choices related to knowledge exchange on ex post innovative outcomes. Building on insights from alliance governance, knowledge-based view, and the contracting literatures, the paper argues that partners’ ex ante contractual commitments signal their strategic intent towards collaboration that will consequently influence their knowledge exchanges during the alliance. It is hypothesized that a contractual commitment to transfer tacit knowledge and the formation of a joint committee are conducive to the generation of innovative outcomes from the alliance. In addition, a contingency perspective is developed and it is hypothesized that the efficacy of these mechanisms varies depending on the extent of co-development of R&D activities and the technological uncertainty of the alliance. The hypotheses are empirically examined using patenting activity from biopharmaceutical alliances in the United States.

Multi-period distribution networks with purchase commitment contracts

Retailers which deliver products directly to their customer locations often rely on Logistics Service Intermediaries (LSI) for order management, warehousing, transportation and distribution services. Usually, the LSI acts as a shipper and subcontracts the transportation to carriers for long-haul and last-mile delivery services. All agents interact and are connected through cross-docking facilities. As the demand from customers may vary significantly over time, the shipper’s requirements for transportation evolve accordingly at the tactical level. This creates opportunities for the shipper to take advantage of medium-term contracts with the carriers at prices lower than those offered by the spot market. The study focuses on the tactical design, through dynamic contracts, of a suitable network of cross-docking facilities and related transportation capacities (belonging to different carriers) to reduce the shipper’s operational costs. In this article, we propose an MILP formulation for the multi-period planning problem with minimum purchase commitment contracts faced by the shipper. We propose exact and heuristic decomposition methods for the the model, respectively, based on combinatorial Benders cuts and on relax-and-repair approaches. The performance of these algorithms is experimentally compared to that of commercial solvers (branch-and-cut and classical Benders). The numerical results show that our methods perform comparatively well for the solution of large size instances and brings economic benefits to the shipper.