Tingting Yan published in Journal of Operations Management
Associate Professor of Global Supply Chain Management Tingting Yan had an article accepted for publication in the Journal of Operations Management. The article, “Incentivizing Supplier Participation in Buyer Innovation: Experimental Evidence of Non-Optimal Contractual Behaviors,” was co-authored with Dina Ribbink and Hubert Pun.
The Journal of Operations Management publishes original, empirical operations management research that demonstrates both academic and practical relevance.
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 literatures, 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: the 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.