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Incentivizing supplier participation in buyer innovation: Experimental evidence of non‐optimal contractual behaviors
Author(s) -
Yan Tingting,
Ribbink Dina,
Pun Hubert
Publication year - 2018
Publication title -
journal of operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.649
H-Index - 191
eISSN - 1873-1317
pISSN - 0272-6963
DOI - 10.1016/j.jom.2017.12.001
Subject(s) - incentive , risk aversion (psychology) , microeconomics , bounded rationality , business , rationality , empirical evidence , revenue , empirical research , new product development , bridging (networking) , product (mathematics) , marketing , economics , industrial organization , expected utility hypothesis , finance , computer science , financial economics , computer network , philosophy , geometry , mathematics , epistemology , political science , law
Original equipment manufacturers increasingly involve suppliers in new product development (NPD) projects. How companies design a contract to motivate supplier participation is an important but under‐examined empirical question. Analytical studies have started to examine the optimal contract that aligns buyer‐supplier incentives in joint NPD projects, but empirical evidence is scarce about the actual contracts offered by buying companies. Bridging the analytical and empirical literature, this paper compares optimal contracting derived from a parsimonious analytical model with actual behaviors observed in an experiment. In particular, we focus on how project uncertainty, buying company effort share, and buyer risk aversion influence three contractual decisions: total investment level, revenue share and fixed fee. Our results indicate significant differences between the optimal and actual behaviors. We identify various types of non‐optimal contractual behaviors, which we explain from a risk aversion as well as a bounded rationality perspective. Overall, our findings contribute to the literature by showing that (1) the actual contractual behaviors could differ significantly from the optimal ones, (2) the actual contract design is sensitive to changes in project uncertainty and buying company effort share, and (3) the significant roles of risk aversion and bounded rationality in explaining the non‐optimal contractual behaviors.