Abstract:
Experimental studies of coordinating contracts find that they fail to coordinate a supply chain and identify the main cause - rejections of a significant proportion of offers by responders due to information asymmetry regarding their preferences for fairness. The current study characterizes the supplier's optimal contract. We prove the optimal contract is (almost surely) pooling, calling for a shut down of the most inequity-averse types whenever the types' density function is continuous, and derive the optimal rejection rate. In terms of managerial insights and testable predictions, we demonstrate that the equivalence of coordinating contracts can break down in this environment - the optimal contract can be implemented with an minimum-order quantity contract but not with a two-part tariff.