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International Journal of Mathematical, Engineering and Management Sciences

ISSN: 2455-7749


Designing a Revenue Sharing Contract under Information Asymmetry

Designing a Revenue Sharing Contract under Information Asymmetry

Jaimini Bhattacharyya
Department of Management Studies, Indian Institute of Technology Madras, Chennai 600036, India.

Rahul R. Marathe
Department of Management Studies, Indian Institute of Technology Madras, Chennai 600036, India.

G. Srinivasan
Department of Management Studies, Indian Institute of Technology Madras, Chennai 600036, India.

DOI https://doi.org/10.33889/IJMEMS.2020.5.5.064

Received on April 09, 2020
  ;
Accepted on May 19, 2020

Abstract

In a supply chain coordinated by a revenue sharing contract, under-reporting of sales revenue has been a common practice amongst retailers who always have private information about the market demand. In this article, we aim to design a mechanism to mitigate this problem. One may design a contract to elicit truthful information from the retailer while maximizing supplier’s payoff. However, we find that such contracts fail to coordinate the supply chain, when the market demand is high. Hence, we study an audit-based revenue sharing contract. First, we design a laboratory experiment to investigate the impact of retailer’s decisions on the subsequent choices made by the supplier. We find that the audit probability chosen by the supplier increases with the gap between retailer’s order quantity and the sales reported by the retailer. We follow this up with a simulation experiment which incorporates the findings of our laboratory experiment. Audit cost and the penalty announced by the supplier for not reporting true sales turned out to be important in making decisions for both the players. We also find the threshold auditing cost beyond which auditing is not economically viable for the supplier.

Keywords- Supply chain, Revenue sharing contract, Information asymmetry, Dishonesty.

Citation

Bhattacharyya, J., Marathe, R. R., & Srinivasan, G. (2020). Designing a Revenue Sharing Contract under Information Asymmetry. International Journal of Mathematical, Engineering and Management Sciences, 5(5), 820-834. https://doi.org/10.33889/IJMEMS.2020.5.5.064.

Conflict of Interest

The authors declare that there is no conflict of interest for this publication.

Acknowledgements

We thank Avilasha, Nilanjan, Mahesh, Kathiresan for helping us conducting the experiment. We thank the editor and the anonymous reviewer for their suggestions on the article. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

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