Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241258 
Year of Publication: 
2021
Citation: 
[Journal:] Production and Operations Management [ISSN:] 1937-5956 [Volume:] 30 [Issue:] 7 [Publisher:] Wiley [Place:] Hoboken, NJ [Year:] 2021 [Pages:] 2252-2272
Publisher: 
Wiley, Hoboken, NJ
Abstract: 
In laboratory experiments, we compare the performance of short-term and long-term contracts in a two-period supplier–buyer dyad with asymmetric cost information. We find that buyers tend to reject offers if the payoff inequality increases from one period to the next. We coin this dynamic form of inequity aversion as “ratcheting aversion.” We show that under short-term contracting, the buyer's ratcheting aversion limits the supplier's leeway to exploit information revelation in earlier periods because suppliers fear contract rejections in later periods. As a result, the suppliers' empirical benefit of offering long-term contracts over short-term contracts is significantly larger than theory predicts. Furthermore, long-term contracts enable supply chain partners to achieve less volatile supply chain performance than short-term contracts because the buyers' ratcheting aversion leads to more contract rejections under short-term contracting. While normative theory predicts that suppliers should include all future informational rents of the buyers in the first-period offer, thereby creating large payoff differences between periods, we show that it can be behaviorally optimal for the supplier to make offers that lead to more equitable payoffs between periods.
Subjects: 
multi‐period interaction
supply chain coordination
behavioral operations management
asymmetric information
menu of contracts
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
Document Version: 
Published Version

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